Butter versus Guns: Economic Interdependence and the Cross-Strait Relations

Abstract

How trade affects the political relations between two rivals has been an intriguing question in IR scholarship. Realists suggest that concerns about relative gains as well as security externalities would hinder trade between two adversaries, as indicative in the India-Pakistan case and between South and North Korea. Liberals, on the other hand, predict that burgeoning trading relationship contribute to the stability between two politically antagonist states, as the Franco-Germany case in the 1950s demonstrated. However, the realist camp cannot explain the growing trade volume between Taiwan and Mainland China since the 1990s, while liberalism cannot explain why significant commerce could not reduce the hostilities between the two political rivals especially in the years of 2000 to 2008. \nA latest effort employs the signaling and communication theory in explaining the cross-Strait relations, suggesting that various players in Taiwan, such as politicians, officials, and business groups, would signal their preferences and willingness for further cooperation across the Taiwan Strait. This group of scholars contends that by signaling costly commitments, trade becomes irreversible and so does the stability between both sides of the Taiwan Strait.\nIn line with this reasoning, this paper examines how economic interdependence helps to stabilize the cross-Strait relations after President Ma Ying-jeou took office in 2008. The singing of the Economic Cooperation Framework Agreement (ECFA) between Taiwan and Mainland China indicates the preferences of the multiple players in maintaining the stability across the Taiwan Strait. In addition, the subsequent establishment of the Cross-strait Economic Cooperation Committee would further institutionalize the interactions between the two rivals in the future. This paper concludes that institutionalization would help to reduce security externalities and uncertainties in the cross-Strait relations.