Interaction between Trade, Conflict andCooperation:
the case of Japan and China
Shiro Armstrong
Crawford School of Economics and Government,
Australian National University
Seminar at Waseda University
July 4 2008

Outline Context and background The trade-conflict literature Data Linear Granger causality
 Nonlinear Granger causality
 Discussion
 Conclusions and further work2

Background Japan-China economic relationship Cold politics and hot economics
 Taiwan, North Korea, Yasukuni shrine, disputed islands,
protests
 China-US?
 Politics-trade?

3Some definitions
 Cooperation
 positive action towards another: eg ODA, security
alliance, cultural exchange Conflict negative action or stance against another: eg protest,
vote against in UN, or even war
 Net cooperation index = cooperation - conflict Interdependence
 vulnerability sensitivity dependence Trade or interdependence?
4

Liberal school of thought
 “Peace is the natural effect of trade” – Montesquieu, 1748
 Positive relationship between cooperation and trade,negative relationship between conflict and trade Trade is influenced significantly by politics – traderelationship with allies and won’t trade with the enemy.
 Mutual gains from trade raise opportunity cost of conflict:disputes, sanctions and wars lead to a loss in welfare
 Kissinger’s détente with Soviet Union, Richard Nixon’s
opening up to China, formation of EU.

5

Realist school of thought Trade causes increased interactions with higher probabilityof disputes, trade wars and dispute escalations
 Hirschman, 1945: gains from trade can have unequal
distribution within and between nations.
 Asymmetry can cause a shift in power relations which canlead to conflict in the extreme case US-Japan in 1980s and US-China now Trade or war to acquire resources6

Other causes of conflict/cooperation
 Distance Extent of political liberalisation
 Enduring rivalries Counter examples of trade during war, changes in behaviour
 How does trade affect conflict/cooperation and vice versa?
 trade embargo or war
 customs union or economic cooperation
 cumulative low level negative events adds up
 instantaneous response? Trade contracts are long,statistics are not reported so frequently.
7Previous empirical studies
 Mixed results but mainly supporting liberal view Recognition of causality running both ways between tradeand cooperation/conflict
 Main data sources are COPDAB, WEIS and MID
 Time series and Granger causality in two papers
 relationship dependent
 reciprocal
 quarterly data

8

Data
 Monthly from 1990-2004
 Trade data exports
 Hirschman’s index of vulnerability and dependence
Tij = (Xij+Mij)/(Xiw+Miw)
 Conflict data IDEA dataset from Gary King, coded from Reuters
 net cooperation = cooperation – conflict Japan-China, China-US and US-Japan
9Japan-China net cooperation40

Li Pengvisits Japan

Yasukuni
Shrine??

20100-20

ODA cut,
dispute overisland

Orgy

China towards Japan2004

October

July

April

2003

October

July

April

-30

October

NK asylum
seekers

July

NK ship in
E Ch Sea

April-10

2002<--ConflictCooperation-->30

6 partytalks, FDI
growthJapan towards China
10China-US net cooperation
Agree to solve
NK probs

100

Cooperation-->80

Satisfactory
trade talks

60
40
20-20-40

Taiwanissues

Trade dispute

US towards China

October

July

April

2004

October

JulyApril

2003

October

July

April-60
2002<--Conflict

0China towards US
11Linear Granger causality
 VAR:
Tt =  a iTt -1 +  b i C t -1i =1i =1

Ct =  a 'i Tt -1 +  b 'i Ct -1
i =1i =1

 Null hypothesis of no Granger causality: βi ’s= 0 in 1st equation, α’i ’s= 0 in 2nd equation
 X Granger causes Y if lagged values of X help explain
values of Y
 Trade de-trended, seasonality controlled for, unit roots
tested and series’ made stationary

12

Results: trade-cooperation, 1990-2004

a. Japanese exports to China= f(Chinese net cooperation)b. Japanese net cooperation= f(Chinese exports to Japan)

Lags Sum of coefficients
7***
13.55
8***
8.72
9**
6.88
10***
12.80
11**
5.87
12**
0.55
12*
13*
14*

-0.024-0.019-0.02313

Dependence-cooperation, 1990-2004
a. Japanese net cooperation= f(Chinese dependence on Japan)

Lags
5**
6**
7**
8***
9**
10**
11**
12**
13**

b. Japanese net cooperation
12*= f(Japanese dependence on China) 13*
14*
15*

Sum of coefficients8101264**
1516**
2244***
2323***
1983**
2719**
2025*
2735*
-752
-180
28662214

Trade-cooperation, 1990-97 and 1998-2004
Trade and cooperationa. Japanese exports to China= f(Chinese net cooperation)

1990-1997
Lags Sum of coeffs
7**
6.30
8**
-1.35
9**
-0.73
10*** 6.48
16*
-12.0

1998-2004
Lags Sum of coeffs
2*
-0.79
3*
-0.54
7*
22.12
12**
8.85
13*
7.44

b. Japanese net cooperation= f(Chinese exports to Japan)

12*
13*
14**
15**
16*

-0.07***-0.06**-0.08***-0.08***-0.07**c. Japanese exports to China= f(Japanese net cooperation)

12***
13**
14**
15**
16*

24.7
25.4
20.5
22.4
22.5

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Nonlinear Granger causality
 Causality, direction of causality and lag lengths vary bycountry pair
 Within country pairs the dynamics and interactions changeover time?
 Nonlinear relationship such as intensity of relationshipdifferent for different levels of cooperation or trade?
 After linear causality stripped from relationship, any
remaining structural relationship in residuals from VAR?

16Nonlinear Granger causality
 From Baek and Brock (1992) extended by Jones andHiemstra (1994), used in financial market analysis(Pr X tm - X sm < e X tLx-Lx - X sLx- Lx < e, CtLc-Lc - CsLc-Lc < e(= Pr X tm - X sm < e X tLx- Lx - X sLx-Lx < e))

C1 (m + Lx, Lc, e ) C3 (m + Lx, e )=C2 (Lx, Lc, e)
C4 (Lx, e)

17Results
e. Trade from Japan to China causes netcooperation from Japan to China

f. net cooperation from Japan to China
causes trade from Japan to Chinae = 1.42

e = 1.25

Lx = Lc

CSt-value

Lx = Lc

CSt-value

1

0.3

0.341

10.1

0.81

2

0.57

0.373

20.335

1.661

**

3

0.48

0.296

3

0.306

1.382

*

4

0.111

0.648

4

0.123

0.438

5

0.4

0.165

5

0.371

1.84

**

6

0.105

0.371

6

0.657

1.584

*

7

0.348

-1.69

**

70.669

1.344

*

8

0.389

-1.35

*

8

0.1241

2.151**

90.479-190.2005

3.297

***

100.1085-1.597*100.2159

2.997

***

110.1806-1.831**110.1965

2.326

**

120.2133-1.684**120.1376

0.994

130.1821-1.542*18

Conclusions for Japan-China 1
 From linear results:
 Ch exports to J increases negative political events from J toChina
 Increased Ch dependence on J increases positive political eventsfrom J to Ch
 Rise in positive political events from Ch to J leads to increased
trade from J to Ch
 From nonlinear results: (direction of causality known, not directionof effect)
 increased Ch imports from J causes a reaction from Ch
 J political events affect trade from Ch to J AND trade from J toCh Trade from J to Ch cause a reaction from J towards Ch19

Conclusions for Japan-China 2
 Which can be summarised….

 Japan’s stance towards China has implications for its traderelationship with China (trade both ways)
 Japan’s trade flows to China cause potentially mixed
reactions from both sides
 Political relationship is constrained by the economic
relationship Strong evidence of nonlinear causality found for all
relationships: importance of testing beyond traditionaltests
 2SLS or 3SLS cross sectional analysis difficult20

Trade asymmetry and conclusions
 Huge Chinese trade flows to the United States causes anegative reaction from US Low intensity conflict between J-Ch and US-Ch
underpinned by a strong stable economic relationship for domestic political gain?
 fear of China in Japan?
 Growing interdependence and the effect on politics
 moves to settle differences, SED
 Recent improved relations

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Further work
 FDI flows and services trade Causality tests and analysis of conflict and cooperation
separately
 Exploring and explaining the nonlinear dynamics
 Restriction of net cooperation variable Multi country world, not in a bilateral vacuum
 Structural breaks: WTO, 2005 protests

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