Qiang Wu
Qiang Wu (Steven) is a second-year MA candidate with a concentration in China Studies. His research interest lies in the relationship between China and the world. He earned his M.A. in Economics at Kyoto University, Japan and B.A. in Political Science at Peking University, China.
Introduction
This research explores China’s retaliatory trade behaviors in the context of territorial disputes, incorporating both quantitative and qualitative methods to analyze territorial conflicts between China and four of its neighboring countries: Japan, India, Vietnam, and the Philippines. This paper finds that territorial conflicts with China are simultaneously accompanied by a reduction in the partner’s exports to China, though the degree of this reduction varies by country. To analyze the reasons for this variance, this study examines subjective factors from China and objective factors from each foreign country in each of the four cases. It reveals that the variance in each country’s export reduction is not directly related to the level of Chinese animosity towards that country; instead, it has to do with the elasticity of demand for the partnering country’s export goods. This finding sheds light on the Chinese government’s possible thinking when it considers retaliatory trade measures during times of territorial conflict. Moreover, this empirical research contributes to the current theoretical debate on the relationship between trade and conflict. It supports the conclusion that an autocracy like China is also subject to economic rules when considering political decisions such as trade retaliation in response to territorial conflicts.
The incorporation of the People’s Republic of China into the existing world order is perhaps the most crucial event of the past thirty years; observers in many countries have taken note of China’s behavior and wondered about the formidable country’s capabilities, desires, and intentions. Along with the creation of new terms like “sharp power”[i] and “weaponized interdependence,”[ii] certain international observers have suggested that countries should exercise caution in developing cultural exchanges or economic interdependence with an autocratic China that could leave them vulnerable to coercion.[iii] The validity of this concern deserves to be examined, and the nature of the potential risk must be determined. Is China’s behavior totally unpredictable, or is the country constrained by economic rules to act in a rational fashion? This research explores this theme by examining China’s economic statecraft during the periods in which it has engaged in territorial conflicts with other countries, focusing on four main events: the Senkaku/Diaoyu Island dispute between China and Japan, the Doklam road construction standoff between China and India, the Scarborough Shoal/Huangyandao dispute between China and the Philippines, and the Ocean Oil 981 standoff between China and Vietnam.
The first section of this paper introduces the theoretical findings in the current literature, poses a research question, and presents three hypotheses. The second section analyzes the three hypotheses respectively, through four case studies. Finally, the third section concludes with some key thoughts and elucidates the contemporary significance of this research.
Theories of Conflict and Trade
The interaction between economic cooperation and political conflict is a key question within International Relations (IR). On the one hand, liberal academics such as Robert Keohane and Joseph Nye hold a positive view of this interaction and contend that increasing interdependence, especially trade dependency between countries, will decrease the possibility of conflict and provide incentives for countries to seek compromise.[iv] Scholars have introduced concepts like “commercial peace” and “trade peace” to illustrate this insight. Anita Kellogg qualifies this theory, noting that the business sector must be sufficiently influential in domestic politics for a reduction effect to take place,[v] a finding that connects the theory of “trade peace” with the “democratic peace” theory”[vi]. This research suggests that democracies, as compared to autocracies, are more hesitant to engage in conflicts with each other.
However, some researchers have a less optimistic interpretation of the virtuous cycle of interdependence and conflict mitigation. Haavard Hegre, Oneal John, and Russett Bruce confirmed with an empirical study that commercial relations promote peace, while at the same time conflict reduces trade.[vii] Beth Simmons focuses on territorial disputes and militarized conflict. She finds that an ongoing territorial dispute has an immediate and negative effect on trade and suggests that the causal effect stems primarily from policy uncertainties and a reduction in jurisdictional control.[viii]
Han Dorussen delves deeper into the issue by disaggregating trade by type. He asserts that trade broadly has a positive effect on reducing conflict but argues that not all trade carries the same weight. For Dorussen, the elasticity of trade is crucial (i.e., the more elastic the goods, the lower the effect they have on reducing conflict, due to the lower opportunity costs generated if trade in those goods is disrupted). Dorussen allocates manufactured goods (incorporating both low-skilled and high-skilled labor) and primary chemical and metal products to the category of inelastic goods, while he places non-manufactured goods and food products into the category of elastic goods.[ix]
Chart 1 below illustrates these theories and their connections. To summarize, current theories indicate that trade reduces the likelihood for conflict, but this effect varies, depending specifically on regime type and goods elasticity. Although inverse relations may exist, to date, there is insufficient research on whether reductions in trade are influenced by other factors, like the severity of the conflict or discrepancies in goods elasticity.
Chart 1: Trade, Elasticity of Goods, and Regime Type
| 1. Trade reduces conflict, but it depends. | |||
| Trade Partner | |||
| Autocracy (-) | Democracy (+) | ||
| Goods Elasticity | Elastic Goods (-) | High conflict possibility | Middle conflict possibility |
| Inelastic Goods (+) | Middle conflict possibility | Low conflict possibility | |
| Note: + and – show the possibility of reducing conflict. + means higher possibility while – means lower | |||
| 2. Contemporaneously, (territorial) conflicts lead to trade reductions. |
Do Countries That Clash with China Put Trade at Risk?
This research aims to contribute to the aforementioned theoretical gap by conducting a case study of territorial disputes between China and its neighboring countries, examining the impact of these conflicts on their trade relationship. The specific research question is:
To what extent and under what conditions do China’s trade partners suffer from export losses when they are engaged in a territorial conflict with China?
Territorial disputes have occurred relatively frequently in recent years between China and neighboring countries, providing a unique opportunity to for comparative analysis. Moreover, territorial issues are so highly political and sensitive in China that territorial conflicts provide legitimacy in Chinese society for the government to conduct trade retaliation against foreign countries with which it has disputes that give rise to various degrees of conflict. This research analyzes four specific bilateral territorial disputes between China and four countries: Japan, India, the Philippines, and Vietnam.
There are three possible sources for this loss in trade: the effects of the Chinese government’s retaliatory trade policy; Chinese consumers’ conscious boycotting activities; and the voluntary decision of foreign exporters to refuse to trade with China.[x] Nevertheless, the influence of the Chinese government is significant among all three potential causes. Along with China’s increasing economic power, the country tends to use its significant economic leverage to achieve its political objectives, despite its membership in the WTO, whose rules limit the use of trade restrictions as a political tool.[xi] For example, research on the “Dalai Lama effect” demonstrates that countries whose highest political leader establishes an official meeting with the Dalai Lama will be punished by a reduction in exports to China.[xii]
In the territorial conflict space, there is evidence of China attempting to employ economic statecraft to achieve its political aims. For example, in the China-Philippines dispute on Scarborough Shoal/Huangyan Dao, Chinese Ambassador to ASEAN Tong Xiaoling warned (when?) that “if the Philippines continues to go its own way, the bilateral relations, including trade and business relations, will be damaged.”[xiii] Coincidently, in May 2012, the Chinese government alleged “pest problems” as a reason to impound Philippine bananas, then the Philippines’ fifth largest export good; its banana sales to China reached US $360 million in 2011.[xiv]
Therefore, there are reasons to believe that the Chinese government has contemplated or conducted retaliatory trade activity in its territorial conflicts with neighboring countries, though there has been no official declaration on this issue.
Three Hypotheses
Having synthesized the wisdom of current literature with the above analysis, this paper introduces the following hypotheses to address the research question:
Hypothesis 1: Territorial conflicts with China are simultaneously accompanied by a reduction in trade, with varying degrees across countries.
This hypothesis seems rather self-evident according to Hegre, John, and Bruce’s general findings in part 1.1, which indicated that conflicts lead to trade reduction.[xv] Nonetheless, empirical evidence must be presented to illustrate how this thesis applies to China, an autocratic state, which in theory behaves in a more bellicose manner than the average foreign economic partner.[xvi] It is also worth exploring whether this trade reduction effect varies based upon the country in question and type of dispute.
Hypothesis 2: The degree of trade reduction is not in accordance with the level of China’s animosity towards the conflict and consequent desire for economic retaliation.
Assuming that Hypothesis 1 holds, the next question is what factors influence these varying degrees of trade reduction. This paper considers two types of factors: subjective and objective, or willingness and feasibility. Willingness is measured by China’s level of animosity toward the offending country, which is presumed exogeneous to any objective economic factors between China and the offending country. Hypothesis 2 maintains that this subjective factor does not accord with these countries’ trade reduction to China. In other words, Hypothesis 2 suggests that China might be a more rational power than some international observers believe – one that treats its trade counterparts differently by means of pragmatic calculation, as discussed in Hypothesis 3.
Hypothesis 3: The degree of trade reduction is in accordance with the trade elasticity of the export goods from the offending country.
In contrast to Hypothesis 2, Hypothesis 3 considers objective issues within the counterpart country. Specifically, Hypothesis 3 discusses the feasibility of substituting each country’s exports to China (i.e., the trade elasticity of these countries’ export goods). This hypothesis is supported by the current literature, albeit from the “trade-peace” direction, which argues that trade elasticity constrains the possibilities of countries involved in conflicts.[xvii] This paper will focus on whether, in the case of China, a trade disaggregating effect exists in the “conflict-trade” direction.
Evidence and Case Studies: Japan, India, the Philippines and Vietnam
This section combines regression analysis with case studies on territorial disputes with China. The reason to employ this dual methodology is that quantitative analysis provides the necessary evidence while qualitative analysis reveals important differences between cases, contributing a more plausible and nuanced reasoning to our understanding of the link between trade retaliation and conflict more broadly. The four cases outlined in this paper include the Senkaku/Diaoyu Island dispute between China and Japan, the Doklam road construction standoff between China and India, the Scarborough Shoal/Huangyandao dispute between China and the Philippines, and the Ocean Oil 981 standoff between China and Vietnam. The study conducts a regression of the territorial disputes’ influence on bilateral trade in each case. Subsequently, based upon the regression results and various subjective and objective conditions inherent to each case, this section discusses the relative explanatory power of the three hypotheses outlined in Section 1.
The basic idea is to run a regression of the exports to China based on each country’s dispute status. In design, this research uses the widely recognized gravity model[xviii] in trade analysis to control the underlying link between countries’ trade relationship with China. The regression function is designed as follows:
Regression Equation: exportst = b1djapant + b3dindiat + b4dphilippinest + b5dvietnamt + b6gdpt + b7popt + b8excht + b9indiat + b10philippinest + b11vietnamt + b12febt + b13mart+ b14aprt+ b15mayt+ b16junt+ b17jult + b18augt + b19sept + b20octt + b21novt +b22dect + et
The dependent variable, exports, stands for each country’s monthly exports to China. This data is taken from the International Monetary Fund’s Direction of Trade Statistics Database.[xix] It is necessary to note, however, that the data of monthly exports to China is calculated by combining the exports to both mainland China and Hong Kong, China. The reason for this is that Hong Kong is a well-known hub for world trade to and from China. Meanwhile, the exports to Hong Kong are too large to be ignored (as opposed to those of Macao, China). In this research, the duration of the exports data starts in January 2002 and ends in December 2018. The starting month is right after China joined the WTO in December 2001, which served as a critical point in that China started to engage more in trade activities with the world. The end month is simply decided by the fact that it reflects the most recent data of all variables that can be surveyed at the time of this research. For the sake of a more comprehensive comparison among different countries whose trade volumes with China vary substantially, the log of this data is calculated for regression.
The variables of interest in this paper are djapan, dindia, dphilippines, and dvietnam. They are dummy variables that are binary. The “d” before each country’s name means “dispute”. Thus, the value of the variable is 1 if the dispute is ongoing in the month under study and 0 if it is not. This research references official Chinese media articles and other academic research to determine the start and end dates of a conflict. The case studies reveal further details.
The control variables include monthly dummy variables, country dummy variables, and gravity model variables. Monthly dummy variables include feb, mar, apr, may, jun, jul, aug, sep, oct, nov, and dec (jan is omitted due to collinearity). These monthly dummy variables are used to control the seasonal factors that influence trade, with a value equal to 1 if the trade data falls in that month and 0 if not. Country dummy variables include india, philippines, and vietnam (japan is omitted due to collinearity).These country dummy variables are used to control each country’s fixed effects that influence trade. The number is 1 if the trade data comes from that country and 0 if not. Meanwhile, gravity model variables include GDP (gdp), population (pop), and exchange rate (exch). GDP refers to the counterpart country’s GDP in current US dollars in that year, and population to the country’s population in that year. Finally, exchange rate refers to the country’s official exchange rate in that year, denoted by its local currency units relative to the Chinese Yuan. To make these variables more standardized in the regression, the log of GDP and population are taken. Data on these gravity model variables has been collected entirely from the World Bank’s World Development Indicators.[xx] et reflects a stochastic error.
For purposes of the regression analysis in this study, we must infer the starting and ending (or stabilizing) time of the dispute, to determine the number assignment of the disputesvariable.
China-Japan Dispute: Senkaku/Diaoyu Islands
The territorial conflict between China and Japan is mainly over the Senkaku/Diaoyu Islands. They have been a source of dispute for Japan and China since the early 1970s, when the United States transferred the island’s “administrative rights” to Japan (in the broader context of returning Okinawa and the Ryukyu Islands to Japan, according to the “reversion” treaty of 1971).[xxi] In the time period this research focuses on (2002-2018), there were three diplomatic crises concerning the islands: the deportation of Chinese activists who landed on the islands in 2004; the detention of a Chinese captain whose fishing boat collided with a Japanese Coast Guard vessel in 2010; and the Japanese central government’s nationalization of three of the Senkaku/Diaoyu Islands in 2012.[xxii] Because the 2004 and 2010 incidents were initiated by civilians, this research treats these events as insufficient to trigger official trade retaliation. Hence, the research focuses only on the 2012 conflict.
To decide the value of the djapan variable, it is necessary to confirm the starting and ending month of the 2012 conflict. The starting date is easier to distinguish. On April 2012, then-Tokyo Metropolitan Governor Shintaro Ishihara proposed that Tokyo buy the Senkaku/Diaoyu Islands from a private owner.[xxiii] Unsurprisingly, this proposal immediately gave rise to criticism from the Chinese government. The ending month, however, is somewhat ambiguous, because the situation gradually stabilized without an official end date. To solve this problem, the paper references two sources, determining that, for the number assignment of the djapan variable, the end of this crisis is October 2012. This is due to the fact that the Japanese Prime Minister Yoshihiko Noda pledged to dissolve Japan’s parliament in November 2012, so the future direction of Japanese foreign policy became unclear.[xxiv] Meanwhile, Shinzo Abe became Prime Minister, in a transition of power from the Democratic Party to the Liberal Democratic Party.[xxv] This dynamic served as an opportunity for both Japan and China to seek a “cooling down” period. From the Chinese point of view, a search of related articles in the official media People’s Daily reveals that articles with a subject including the key word “钓鱼岛”(Diaoyu Island) significantly decreased after this month (i.e., only one article was published with this key word in November, as compared to 24 in October). Thus, in the China-Japan case, the djapan variable is set to be 1 for April-October 2012.
China-India Dispute: Daulat Beg and Doklam Plateau
Two major territorial conflicts occurred during the 2002-2018 period between China and India. The first is the Daulat Beg Oldi Incident, a standoff between border forces on both sides in 2013. [xxvi] It began in April and ended in May, [xxvii] with both China and India agreeing to withdraw from the disputed area.[xxviii] The second was the Doklam Road Construction Standoff, which lasted longer and proved to be more influential. It began when the Chinese People’s Liberation Army (PLA) started to build a road in a disputed region of the Doklam Plateau, near the Bhutan-China-India tri-junction in June 2017. After Bhutan turned to India for assistance, the Indian Army entered the area to halt construction. Subsequently, military units from China and India became involved in a close confrontation which eventually ended when the Chinese forfeited the road construction and both armies left the area in August.[xxix] Thus, in this research, the dindia variable is set to be 1 for April-May 2013 and June-August 2017.
China-Philippines Dispute: Scarborough Shoal/Huangyan Dao
In the South China Sea, China’s dispute with the Philippines began on April 8, 2012, with the Philippine Navy’s apprehension of eight mainland Chinese fishing vessels near the disputed Scarborough Shoal/Huangyan Dao.[xxx] Between April and June 2012, China and the Philippines were engaged in a tense standoff.[xxxi] In mid-June 2012, the two countries withdrew their civilian vessels on the pretext of the onset of the typhoon season, aiming to de-escalate the tension.[xxxii] Afterwards, both countries persisted in claiming sovereignty over the shoal,[xxxiii] yet tensions between the two sides over the dispute have been markedly lower. Thus, in this research, the dphilippines variable is set to be 1 only from April to June 2012.
China-Vietnam Dispute: The South China Sea
Though the dispute between China and Vietnam over the South China Sea existed throughout the research period (2002 – 2018), the Haiyang Shiyou 981 standoff was the most serious demonstration of that dispute, involving both countries’ official ships. The conflict started in May 2014, with skirmishes following China’s move to station an oil rig known as the Hai Yang Shi You 981 in waters contested by Vietnam.[xxxiv] This action triggered a series of anti-China protests in Vietnam, which led to more than a dozen foreign-owned factories being torched by protestors.[xxxv] After two and a half months, China moved the rig out of the waters that Vietnam considers to be its exclusive economic zone.[xxxvi] Accordingly, the dvietnam variable is set to be 1 from May to July 2014.
Testing Hypothesis 1
Chart 2 summarizes the four countries’ disputes with China. It is worth noting that China was the first mover in the India and Vietnam cases, but the second mover in the Japan and Philippines cases; this difference is crucial for the analysis.
Chart 2: Summary of Disputes
| Country | Japan | India | Philippines | Vietnam |
| Dispute | Senkaku-Diaoyu Island Dispute | Daulat Beg Oldi Incident | Scarborough Shoal/Huangyan Dao Standoff | Hai Yang Shi You 981 Standoff |
| Doklam Road Construction | ||||
| Period of Conflict | April 2012 to October 2012 | April to May 2013 | April to June 2012 | May to July 2014 |
| June to August 2017 | ||||
| Conflict Duration | 7 months | 5 months | 3 months | 3 months |
| First Mover | Japan | China | Philippines | China |
Source: media sources cited above, edited by the author
With the four dispute-related variables constructed, this study carries out an Ordinary Least Squares (OLS) regression. Chart 3 demonstrates the regression result. Generally speaking, the model is very good at explaining the exports to China from these countries, with R-squared valued at 0.966. Most control variables show a certain degree of statistical significance. In terms of the four dispute-related variables, all coefficients display the desired negative signs, though three of them are statistically insignificant. In terms of the degree of trade reduction influenced by disputes, the four countries’ coefficients vary substantially. However, it remains unclear what causes these differences. Possible explanations will be discussed in Hypotheses 2 and 3. Overall, based on the regression results, it is reasonable to confirm that territorial conflicts with China are simultaneously accompanied by trade reduction, with varying degrees across countries. In other words, Hypothesis 1 holds.
That said, it is necessary to mention the limitations of this OLS regression. The first is Omitted Variable Bias (OVB), given that it is quite difficult to rule out the possibility that other factors contributed to the trade variance. As such, there could be some other control variables that should have been included in this regression. The second is the issue of reverse causation. Although it sounds counterintuitive, there is a small possibility that a decrease in exports causes territorial disputes.
Chart 3: Regression Result
Testing Hypothesis 2
Hypothesis 2 focuses on the relationship between trade reduction and China’s willingness to punish a rival country. In this hypothesis, willingness is equivalent to China’s level of animosity and resentment towards the rival country, measured by a new variable: China’s “Animosity Index”. This has been calculated by counting the number of relevant articles published by a Chinese official media source, The People’s Daily, whose articles were retrieved from the CNKI China core newspapers’ full-text database.[xxxvii] These articles were searched by respective keywords during the dispute’s period. The key word for the China-Japan dispute is “钓鱼岛” (Diaoyu Island); for the China-India dispute, “印度&领土” (India & Territory); for the China-Philippines dispute, “黄岩岛” (Huangyan Dao); and, for the China-Vietnam dispute, “越南&南海” (Vietnam & South China Sea). The number of articles is further standardized by averaging the duration of the disputes. Chart 4 displays the search results and calculates China’s “Animosity Index:”
Chart 4: China’s “Animosity Index” on the Four Disputes
| Country | Japan | India | Philippines | Vietnam |
| Number of Articles | 111 | 4 | 27 | 7 |
| Months of Duration | 7 | 5 | 3 | 3 |
| China’s “Animosity Index” | 15.9 | 0.8 | 9.0 | 2.3 |
Source: CNKI China Core Newspapers’ Full-text Database
Examining Chart 4, it is necessary to note that China was the first mover, or breaker of the “status quo” in the cases of India and Vietnam, while in the case of Japan and the Philippines, China was passively involved, as a “status quo” taker. These facts are reflected in the “Animosity Index,” suggesting that China will be more offended if it is the second mover, but less offended if it is the first. Hence, it is natural to infer that increasing Chinese animosity would lead to a Chinese-imposed economic punishment on the offending country, according to the existing level of contention.
However, this supposition is not supported when comparing the “Animosity Index” in Chart 4 with the coefficients of the four dispute-related variables in Chart 3. Before making a case –by-case analysis, it is necessary to distinguish between the countries. Considering the power asymmetries among these four countries, which may affect China’s consideration in the following discussion, the research places Japan and India in one group while placing the Philippines and Vietnam in another. The countries in each group are closely related in terms of their economic strength. Coincidently, there is one country in each group that acts as a first mover in its conflict with China, while the other country acts as a second mover.
Comparing Japan and India, we find that, even though Japan has a rating about 20 times that of India on the “Animosity Index,” it has a much lower coefficient on the djapan variable than on the dindia variable. This lower coefficient demonstrates a lower degree of export reduction in Japan’s dispute with China than in the case of India. Additionally, the coefficient of djapan is statistically insignificant with a very high p-value (0.607), while the coefficient of dindia is statistically significant in the 0.05 significance level. Meanwhile, the Philippines and Vietnam cases are similar to Japan and India’s. The Philippines’ “Animosity Index” is about four times higherthan Vietnam’s, though the two countries’ coefficients on the dispute variables are the same.
Moreover, the “Animosity Index” is also helpful in distinguishing the trade reduction effects caused by different sources – namely, the government, consumers, and exporters. It is reasonable to assume that, compared to the Chinese government, Chinese consumer behavior is more significantly influenced by the media.[xxxviii] Therefore, it is plausible to suggest that the media exposure of a dispute should largely correlate with a consumer reduction in purchasing that country’s goods. A similar logic can be applied to exporters’ own considerations. If this is the case, the significant contrast between China’s “animosity level” and the trade reduction effect on the four countries cannot be attributed to factors related to the consumer or the exporter. Rather, the contrast must be related to the Chinese government’s differential trade retaliation policies which, instead of being subject to the “Animosity Index,” must be related to China’s rational judgment of these different counterpart countries.
Overall, the above phenomenon and subsequent analysis strongly supports Hypothesis 2, which affirms that the degree of trade reduction is not in accordance with the “Animosity Index”.
Testing Hypothesis 3
In contrast to Hypothesis 2, Hypothesis 3 focuses on the objective aspect of these disputes: namely, the characteristics of the four involved countries. Now that Hypothesis 2 has affirmed that the subjective reasons (i.e., the Chinese government’s level of animosity towards its offending counterpart) are dissociated from the level of trade reduction, we must consider whether any objective elements can explain this reduction in trade. In Hypothesis 3, trade elasticity is considered the objective factor that influences the Chinese government’s decision on trade retaliation policy.
To analyze trade elasticity, this research collects disaggregated trade data from the United Nations COMTRADE database.[xxxix] Details of the four countries’ top ten exports to mainland China and Hong Kong, both in the year when the dispute happened and in the year preceding the dispute, are displayed in Appendices 1 through 8[1], with one finding especially worth mentioning. Although there was evidence demonstrating that China had put in place some embargo regulations on the Philippines’ banana exports,[xl] “edible fruit and nuts” goods from the Philippines continued to increase in 2012, as the dispute was then happening.[xli]
Chart 5 summarizes the eight appendices and finds that Japan and the Philippines have a much lower rate of raw material/agricultural product exports to China than India and Vietnam. Both Japan and the Philippines reflect very high rates of manufactured goods, while India and Vietnam exhibit lower rates. Considering that manufactured goods are in general more difficult to substitute than raw material/agricultural products, it is reasonable to speculate that countries that export lower elasticity goods (i.e., Japan and the Philippines) should suffer less from trade reduction than countries exporting higher elasticity goods (i.e., India and Vietnam). Comparing the results of Chart 5 with the regression results of Chart 3 conclusively verifies this speculation; especially in the Japan-India group, where Japan suffers less, and India suffers more. In the Philippines-Vietnam group, the Philippines and Vietnam suffer the same trade reduction, although China has a much higher “Animosity Index” towards the Philippines.
Chart 6 demonstrates the commodities that suffered the most serious export declines in the year preceding the onset of the dispute. The chart shows that seven out of eight types of commodities (“Nuclear reactors” is the only one that belongs to the manufactured category) are high elasticity goods, especially of the raw material/agricultural variety. This finding further bolsters the above argument by verifying that China’s trade retaliation has generally concentrated on the raw material/agricultural sector.
To summarize, the above analysis of the four countries’ cases confirms that, when territorial disputes take place, the trade elasticity of the offending country’s exports is the key factor that influences its degree of trade reduction vis-à-vis China. In other words, Hypothesis 3 holds.
Chart 5: Disaggregated Trade in Year of Dispute
| To Mainland China | ||
| Country | Manufacturing Goods Total Percentage | Raw Materials/Agricultural Total Percentage |
| Japan | 77.64% | 2.70% |
| India | 25.95% | 49.12% |
| Philippines | 75.97% | 15.91% |
| Vietnam | 26.30% | 44.93% |
| To Hong Kong | ||
| Country | Manufacturing Goods Total Percentage | Raw Materials/Agricultural Total Percentage |
| Japan | 71.02% | 8.56% |
| India | 2.45% | 94.29% |
| Philippines | 87.57% | 8.92% |
| Vietnam | 81.30% | 7.88% |
| Note: The percentage is calculated based on that country’s top ten exports data in Appendices 1-8. |
Source: United Nations COMTRADE database
Chart 6: Commodity Export Decreased Rate
| To Mainland China | ||||
| Country | Commodity | Proportion in Dispute Year | Proportion in the Year before Dispute | Decrease Rate |
| Japan | Nuclear reactors, boilers, machinery and mechanical appliances; parts thereof | 20.76% | 24.24% | -14.36% |
| India | Cotton | 9.23% | 14.17% | -34.86% |
| Philippines | Copper and articles thereof | 2.34% | 5.37% | -56.42% |
| Vietnam | Rubber and articles thereof | 5.57% | 9.14% | -39.06% |
| To Hong Kong | ||||
| Country | Commodity | Proportion in Dispute Year | Proportion in the Year before Dispute | Decrease Rate |
| Japan | Mineral fuels, mineral oils and products of their distillation; bituminous substances; mineral waxes | 4.27% | 4.59% | -6.97% |
| India | Raw hides and skins (other than fur skins) and leather | 1.46% | 1.81% | -19.34% |
| Philippines | Copper and articles thereof | 1.10% | 1.77% | -37.85% |
| Vietnam | Cereals | 1.81% | 2.59% | -30.12% |
Note:
1. This chart shows the decrease rate of the commodity whose export proportion decreased the most in the Dispute Year, compared with The Year before The Dispute All data come from Appendices 1-8.
2. The number in the “Proportion in Dispute Year” and “Proportion in the Year before Dispute” column is the ratio of that time period’s goods in the whole export of that country to China.
3. The “Decrease Rate” is calculated by the equation:
(“Proportion in Dispute Year” – “Proportion in the Year before Dispute”)/ “Proportion in the Year before Dispute”
Source: United Nations COMTRADE database
Conclusion
Combining regression analysis and case studies, this paper suggests that all three hypotheses hold when tested in the context of the four cases thus described. The research finds that, in China’s case, territorial conflicts accompany an immediate reduction in the rival country’s exports to China. The degree of this reduction does not depend upon how angry or vindictive China is, but rather, on the elasticity of demand for the offending country’s export goods. This finding suggests that, although China can be a difficult power to engage with, it is, like other countries, largely rational when employing trade retaliation as a policy of economic statecraft.
The research also finds that the first mover in these disputes matters. On the one hand, if the rival country moves first in a territorial conflict, China will be more offended; on the other hand, if China moves first, it will be less offended. In any case, however, China’s level of animosity in the conflict does not influence the degree of its reduction in importing the rival country’s goods. Considering that China’s level of animosity should accord with the purchasing patterns of Chinese consumers, as well as with the hesitance of a rival country’s exporters to continue exporting to China, this paper strongly suggests that the difference in the degree of reduction in the rival country’s exports to China chiefly derives from the Chinese government’s behavior (e.g., trade retaliation policy).
For further studies, it would be helpful to investigate whether there is any official evidence that the Chinese government conducted specific trade retaliation policies against offending countries during its periods of territorial conflict with them. Moreover, considering the possible delay in policy implementation, the lagging effect of trade retaliation policy would also be worth exploring. Finally, by comparing territorial conflicts with other types of conflicts, it might be possible to determine whether the Chinese government exhibits different trade retaliation preferences when dealing with different types of perceived aggression.
From a theoretical standpoint, this research also serves as an empirical example to complement existing studies on “trade peace” or “democratic peace.” This article demonstrates that, although conflicts simultaneously lead to trade reduction, the strength of the trade relationship (i.e., trade inelasticity) matters. The more inelastic the trade, the more resilient trade will be during political conflicts. This consistency in trade relationships may in turn serve to stabilize conflicts between the two sides, according to “trade peace” theory. This finding strongly underscores the idea that interdependence is valuable to peace by confirming that an autocratic country like China is at the same time pragmatic and subject to economic rules, so long as it continues to engage in the world trade system.
Such a belief in interdependence and in the relevance of international “trade peace” is even more significant in the contemporary era, with anti-globalization, nationalist, and populist ideologies sweeping across the globe, among autocracies and democracies alike. Some in the U.S. have promoted more extreme ideas, such as fundamentally “decoupling” the U.S. from China. However, there is no evidence in this research to suggest that an autarkic country of China’s magnitude would be easier to deal with, or even be able to coexist, with liberal democracies in the West. The challenges of interdependence with a difficult but rational power are considerable, but these challenges pale in comparison to the prospect of cold war with such a power.
Appendix 1:
Note: “Change from 2011” is the percentage point change, calculated by using that commodity’s percentage in the dispute’s year to minus its percentage in the year before the dispute. Similar to other appendices.
| Japan’s Top 10 Exports to Mainland China | |||||
| 2011 | 2012 | ||||
| Commodity | Percentage of total exports | Commodity | Percentage of total exports | Change from 2011 | |
| Nuclear reactors, boilers, machinery and mechanical appliances; parts thereof | 0.2424 | Electrical machinery and equipment and parts thereof; sound recorders and reproducers; television image and sound recorders and reproducers, parts and accessories of such articles | 0.2136 | 0.0083 | |
| Electrical machinery and equipment and parts thereof; sound recorders and reproducers, television image and sound recorders and reproducers, and parts and accessories of such articles | 0.2053 | Nuclear reactors, boilers, machinery and mechanical appliances; parts thereof | 0.2076 | -0.0348 | |
| Vehicles other than railway or tramway rolling-stock, and parts and accessories thereof | 0.0954 | Vehicles; other than railway or tramway rolling stock, and parts and accessories thereof | 0.0941 | -0.0013 | |
| Optical, photographic, cinematographic, measuring, checking, precision, medical or surgical instruments and apparatus; parts and accessories thereof | 0.0713 | Optical, photographic, cinematographic, measuring, checking, medical or surgical instruments and apparatus; parts and accessories | 0.083 | 0.0117 | |
| Iron and steel | 0.0595 | Iron and steel | 0.0568 | -0.0027 | |
| Plastics and articles thereof | 0.0541 | Plastics and articles thereof | 0.0552 | 0.0011 | |
| Organic chemicals | 0.047 | Organic chemicals | 0.0521 | 0.0051 | |
| Commodities not specified according to kind | 0.041 | Commodities not specified according to kind | 0.0456 | 0.0046 | |
| Copper and articles thereof | 0.0232 | Copper and articles thereof | 0.027 | 0.0038 | |
| Mineral fuels, mineral oils and products of their distillation; bituminous substances; mineral waxes | 0.0134 | Iron or steel articles | 0.0141 | Unknown | |
Appendix 2:
| Japan’s Top 10 Exports to Hong Kong | |||||
| 2011 | 2012 | ||||
| Commodity | Percentage of total export | Commodity | Percentage of total export | Change from 2011 | |
| Electrical machinery and equipment and parts thereof; sound recorders and reproducers, television image and sound recorders and reproducers, and parts and accessories of such articles | 0.3153 | Electrical machinery and equipment and parts thereof; sound recorders and reproducers; television image and sound recorders and reproducers, parts and accessories of such articles | 0.3143 | -0.0009 | |
| Commodities not specified according to kind | 0.1153 | Commodities not specified according to kind | 0.1173 | 0.002 | |
| Nuclear reactors, boilers, machinery and mechanical appliances; parts thereof | 0.0942 | Nuclear reactors, boilers, machinery and mechanical appliances; parts thereof | 0.0911 | -0.0032 | |
| Natural or cultured pearls, precious or semi-precious stones, precious metals, metals clad with precious metal, and articles thereof; imitation jewelry; coin | 0.0851 | Natural, cultured pearls; precious, semi-precious stones; precious metals, metals clad with precious metal, and articles thereof; imitation jewelry; coin | 0.0856 | 0.0005 | |
| Plastics and articles thereof | 0.058 | Optical, photographic, cinematographic, measuring, checking, medical or surgical instruments and apparatus; parts and accessories | 0.0584 | 0.002 | |
| Optical, photographic, cinematographic, measuring, checking, precision, medical or surgical instruments and apparatus; parts and accessories thereof | 0.0564 | Plastics and articles thereof | 0.0567 | -0.0013 | |
| Mineral fuels, mineral oils and products of their distillation; bituminous substances; mineral waxes | 0.0459 | Mineral fuels, mineral oils and products of their distillation; bituminous substances; mineral waxes | 0.0427 | -0.0033 | |
| Clocks and watches and parts thereof | 0.0212 | Ships, boats and floating structures | 0.0263 | 0.0056 | |
| Vehicles other than railway or tramway rolling-stock, and parts and accessories thereof | 0.0207 | Clocks and watches and parts thereof | 0.0236 | 0.0024 | |
| Ships, boats and floating structures | 0.0206 | Vehicles; other than railway or tramway rolling stock, and parts and accessories thereof | 0.0225 | 0.0019 | |
Appendix 3:
| India’s Top 10 Exports to Mainland China | |||||
| 2016 | 2017 | ||||
| Commodity | Percentage of total export | Commodity | Percentage of total export | Change from 2016 | |
| Cotton | 0.1417 | Organic chemicals | 0.1353 | 0.0472 | |
| Ores, slag and ash | 0.1308 | Ores, slag and ash | 0.1214 | -0.0094 | |
| Organic chemicals | 0.0881 | Copper and articles thereof | 0.1102 | 0.0384 | |
| Mineral fuels, mineral oils and products of their distillation; bituminous substances; mineral waxes | 0.0785 | Cotton | 0.0923 | -0.0493 | |
| Copper and articles thereof | 0.0718 | Mineral fuels, mineral oils and products of their distillation; bituminous substances; mineral waxes | 0.0814 | 0.0029 | |
| Salt; sulfur; earths, stone; plastering materials, lime and cement | 0.0574 | Nuclear reactors, boilers, machinery and mechanical appliances; parts thereof | 0.0533 | 0.001 | |
| Nuclear reactors, boilers, machinery and mechanical appliances; parts thereof | 0.0523 | Salt; sulfur; earths, stone; plastering materials, lime and cement | 0.0521 | -0.0053 | |
| Electrical machinery and equipment and parts thereof; sound recorders and reproducers; television image and sound recorders and reproducers, parts and accessories of such articles | 0.0437 | Electrical machinery and equipment and parts thereof; sound recorders and reproducers; television image and sound recorders and reproducers, parts and accessories of such articles | 0.0368 | -0.0069 | |
| Animal or vegetable fats and oils and their cleavage products; prepared animal fats; animal or vegetable waxes | 0.0303 | Plastics and articles thereof | 0.0341 | 0.0042 | |
| Plastics and articles thereof | 0.03 | Animal or vegetable fats and oils and their cleavage products; prepared animal fats; animal or vegetable waxes | 0.0337 | 0.0034 | |
Appendix 4:
| India’s Top 10 Exports to Hong Kong | |||||
| 2016 | 2017 | ||||
| Commodity | Percentage of total export | Commodity | Percentage of total export | Change from 2016 | |
| Natural, cultured pearls; precious, semi-precious stones; precious metals, metals clad with precious metal, and articles thereof; imitation jewelry; coin | 0.9122 | Natural, cultured pearls; precious, semi-precious stones; precious metals, metals clad with precious metal, and articles thereof; imitation jewelry; coin | 0.9091 | -0.0031 | |
| Raw hides and skins (other than fur skins) and leather | 0.0181 | Electrical machinery and equipment and parts thereof; sound recorders and reproducers; television image and sound recorders and reproducers, parts and accessories of such articles | 0.0148 | 0.0001 | |
| Electrical machinery and equipment and parts thereof; sound recorders and reproducers; television image and sound recorders and reproducers, parts and accessories of such articles | 0.0146 | Raw hides and skins (other than fur skins) and leather | 0.0146 | -0.0035 | |
| Mineral fuels, mineral oils and products of their distillation; bituminous substances; mineral waxes | 0.0082 | Mineral fuels, mineral oils and products of their distillation; bituminous substances; mineral waxes | 0.0101 | 0.0019 | |
| Fish and crustaceans, molluscs and other aquatic invertebrates | 0.0059 | Iron and steel | 0.0074 | Unknown | |
| Cotton | 0.0053 | Fish and crustaceans, molluscs and other aquatic invertebrates | 0.0052 | -0.0001 | |
| Apparel and clothing accessories; not knitted or crocheted | 0.0029 | Cotton | 0.0039 | -0.0013 | |
| Oil seeds and oleaginous fruits; miscellaneous grains, seeds and fruit, industrial or medicinal plants; straw and fodder | 0.0029 | Nuclear reactors, boilers, machinery and mechanical appliances; parts thereof | 0.0038 | 0.0013 | |
| Nuclear reactors, boilers, machinery and mechanical appliances; parts thereof | 0.0025 | Organic chemicals | 0.0031 | 0.0011 | |
| Organic chemicals | 0.002 | Apparel and clothing accessories; not knitted or crocheted | 0.0028 | 0 | |
Appendix 5:
| Philippines’ Top 10 Exports to Mainland China | |||||
| 2011 | 2012 | ||||
| Commodity | Percentage of total export | Commodity | Percentage of total export | Change from 2011 | |
| Machinery and mechanical appliances; parts thereof | 0.3235 | Electrical machinery and equipment and parts thereof; sound recorders and r … | 0.4123 | 0.2511 | |
| Commodities not specified according to kind | 0.2356 | Machinery and mechanical appliances; parts thereof | 0.2899 | -0.0336 | |
| Electrical machinery and equipment and parts thereof; sound recorders and r … | 0.1612 | Ores, slag and ash | 0.1116 | 0.0395 | |
| Ores, slag and ash | 0.0721 | Mineral fuels, mineral oils and products of their distillation | 0.024 | -0.0049 | |
| Copper and articles thereof | 0.0537 | Copper and articles thereof | 0.0234 | -0.0303 | |
| Mineral fuels, mineral oils and products of their distillation | 0.029 | Optical, photographic, cinematographic, measuring, checking, precision, med … | 0.0205 | 0.0138 | |
| Plastics and articles thereof | 0.0201 | Edible fruit and nuts; peel of citrus fruit or melons | 0.0175 | 0.0025 | |
| Edible fruit and nuts; peel of citrus fruit or melons | 0.015 | Plastics and articles thereof | 0.0137 | -0.0064 | |
| Animal or vegetable fats and oils | 0.0144 | Vehicles other than railway or tramway rolling stock | 0.0122 | 0.0002 | |
| Organic chemicals | 0.0123 | Organic chemicals | 0.0111 | -0.0012 | |
Appendix 6:
| Philippines’ Top 10 Exports to Hong Kong | |||||
| 2011 | 2012 | ||||
| Commodity | Percentage in total export | Commodity | Percentage of total export | Change from 2011 | |
| Electrical machinery and equipment and parts thereof; sound recorders and r … | 0.402 | Electrical machinery and equipment and parts thereof; sound recorders and r … | 0.6143 | 0.2123 | |
| Commodities not specified according to kind | 0.2953 | Machinery and mechanical appliances; parts thereof | 0.1389 | -0.0108 | |
| Machinery and mechanical appliances; parts thereof | 0.1497 | Ships, boats and floating structures | 0.0726 | 0.0392 | |
| Ships, boats and floating structures | 0.0334 | Optical, photographic, cinematographic, measuring, checking, precision, med … | 0.0499 | 0.0388 | |
| Natural or cultured pearls, precious or semi-precious stones | 0.0209 | Mineral fuels, mineral oils and products of their distillation | 0.0303 | 0.0136 | |
| Copper and articles thereof | 0.0177 | Natural or cultured pearls, precious or semi-precious stones | 0.0189 | -0.002 | |
| Mineral fuels, mineral oils and products of their distillation | 0.0167 | Fish and crustaceans, molluscs and other aquatic invertebrates | 0.0147 | -0.0005 | |
| Fish and crustaceans, molluscs and other aquatic invertebrates | 0.0152 | Copper and articles thereof | 0.011 | -0.0066 | |
| Optical, photographic, cinematographic, measuring, checking, precision, med … | 0.0112 | Edible fruit and nuts; peel of citrus fruit or melons | 0.0072 | 0.0012 | |
| Edible fruit and nuts; peel of citrus fruit or melons | 0.006 | Tanning or dyeing extracts | 0.0071 | 0.007 | |
Appendix 7:
| Vietnam’s Top 10 Exports to Mainland China | |||||
| 2013 | 2014 | ||||
| Commodity | Percentage of total export | Commodity | Percentage of total export | Change from 2013 | |
| Electrical machinery and equipment and parts thereof; sound recorders and reproducers; television image and sound recorders and reproducers, parts and accessories of such articles | 0.1861 | Electrical machinery and equipment and parts thereof; sound recorders and reproducers; television image and sound recorders and reproducers, parts and accessories of such articles | 0.1794 | -0.0067 | |
| Mineral fuels, mineral oils and products of their distillation; bituminous substances; mineral waxes | 0.0965 | Mineral fuels, mineral oils and products of their distillation; bituminous substances; mineral waxes | 0.115 | 0.0185 | |
| Rubber and articles thereof | 0.0914 | Cotton | 0.0789 | 0.0146 | |
| Wood and articles of wood; wood charcoal | 0.0724 | Cereals | 0.06 | -0.0086 | |
| Cereals | 0.0686 | Rubber and articles thereof | 0.0557 | -0.0357 | |
| Cotton | 0.0644 | Wood and articles of wood; wood charcoal | 0.0508 | -0.0216 | |
| Nuclear reactors, boilers, machinery and mechanical appliances; parts thereof | 0.051 | Nuclear reactors, boilers, machinery and mechanical appliances; parts thereof | 0.0484 | -0.0026 | |
| Products of the milling industry; malt, starches, inulin, wheat gluten | 0.0479 | Fruit and nuts, edible; peel of citrus fruit or melons | 0.0464 | 0.0025 | |
| Fruit and nuts, edible; peel of citrus fruit or melons | 0.0439 | Products of the milling industry; malt, starches, inulin, wheat gluten | 0.0425 | -0.0054 | |
| Fish and crustaceans, molluscs and other aquatic invertebrates | 0.0315 | Footwear; gaiters and the like; parts of such articles | 0.0352 | 0.0068 | |
Appendix 8:
| Vietnam’s Top 10 Exports to Hong Kong | |||||
| 2013 | 2014 | ||||
| Commodity | Percentage of total export | Commodity | Percentage of total export | Change from 2013 | |
| Optical, photographic, cinematographic, measuring, checking, medical or surgical instruments and apparatus; parts and accessories | 0.3509 | Electrical machinery and equipment and parts thereof; sound recorders and reproducers; television image and sound recorders and reproducers, parts and accessories of such articles | 0.3693 | 0.0224 | |
| Electrical machinery and equipment and parts thereof; sound recorders and reproducers; television image and sound recorders and reproducers, parts and accessories of such articles | 0.3469 | Optical, photographic, cinematographic, measuring, checking, medical or surgical instruments and apparatus; parts and accessories | 0.3285 | -0.0224 | |
| Nuclear reactors, boilers, machinery and mechanical appliances; parts thereof | 0.0674 | Nuclear reactors, boilers, machinery and mechanical appliances; parts thereof | 0.0573 | -0.01 | |
| Footwear; gaiters and the like; parts of such articles | 0.0287 | Footwear; gaiters and the like; parts of such articles | 0.0284 | -0.0003 | |
| Fish and crustaceans, molluscs and other aquatic invertebrates | 0.026 | Fish and crustaceans, molluscs and other aquatic invertebrates | 0.0239 | -0.0021 | |
| Cereals | 0.0259 | Raw hides and skins (other than fur skins) and leather | 0.0235 | 0.0059 | |
| Wood and articles of wood; wood charcoal | 0.0176 | Cereals | 0.0181 | -0.0078 | |
| Raw hides and skins (other than furskins) and leather | 0.0176 | Apparel and clothing accessories; knitted or crocheted | 0.0168 | -0.0006 | |
| Apparel and clothing accessories; knitted or crocheted | 0.0174 | Wood and articles of wood; wood charcoal | 0.0133 | -0.0043 | |
| Apparel and clothing accessories; not knitted or crocheted | 0.0121 | Apparel and clothing accessories; not knitted or crocheted | 0.0127 | 0.0006 | |
Source of the eight appendices: United Nations COMTRADE database.
[1] Appendices 1 through 8 appear in the online version of the article, found at saiscsr.org.
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[iii] Ibid.
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[xviii]Jeffrey H. Bergstrand, “The Gravity Equation in International Trade: Some Microeconomic Foundations and Empirical Evidence,” The Review of Economics and Statistics, 67 (3, 1985): 474–481.
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[xl] Ortuoste, 240-253.
[xli] Appendices 5 and 6, found in online version of this article at saiscsr.org.
The SAIS China Studies Review 