Will trade keep the peace in Asia?

Nineteenth century free trade crusader and main opponent of Great Britain’s Corn Law tariffs Richard Cobden wrote that "free trade is God’s diplomacy and there is no other certain way of uniting people in the bonds of peace."

Washington must now hope that that notion will prove true. Otherwise it may have to decide whether to back its allies in war with China as well as which of its allies to back as they go to war with each other.

The precedents are not promising. From 1900-1910, the world economy became more globalized and integrated than it ever had been and than it would again be until about 1995. In 1909, Norman Angell published The Great Illusion, a book warning of the potential damage to the global economy and therefore of the madness of any policy of going to war. Indeed, Angell argued that war was unthinkable. Unfortunately, it turned out in 1914 to be all too thinkable despite the high degree of global economic integration.

More recently, New York Times columnist Tom Friedman predicted in his book, The Lexus and the Olive Tree, that no two countries with McDonald’s restaurants would ever go to war. That turned out to be one of Tom’s less fortunate predictions when the United States and its allies began bombing Serbia during the Bosnian War of the early 1990s. Not discouraged, Tom doubled down in his follow on book, The World is Flat, by arguing that no two countries that share a global supply chain will go to war.

Well, China has just sent six ships to patrol the waters of what Japan claims are its  Senkaku Islands, of what China says are its Diaoyu Islands, and of what Taiwan says are its Diaoyutai. This is in response to the Japanese government’s purchase of the islands from private owners in a move aimed at avoiding conflict with China by preempting the acquisition of the islands by the archnationalist Mayor of Tokyo, Shintaro Ishihara. Meanwhile, just to keep things interesting, South Korean President Lee Myung-bak recently made an unprecedented visit to what Seoul claims are its Dokdo Islands (rocks would be a better description) and what Tokyo claims are its Takeshima islands. This was in the context of various exchanges between Korea and Japan regarding the need for an apology for World War II by Japan’s emperor before he would be issued an invitation to visit Korea and the statement by Japanese Prime Minister Noda that there is no concrete evidence of the Japanese military forcing Korean women to become "Comfort Women" during World War II.

Of course all four economies ( Japan, South Korea, Taiwan, China) are locked into the iPhone and other common supply chains and Japan, South Korea, and China are talking about negotiating a three way free trade agreement while also agreeing to join in the Comprehensive Regional Economic Partnership free trade deal now being negotiated between the members of the Association of Southeast Asian Nations, Australia, China, Japan, Korea, India, and New Zealand.

So far at least, all the supply chain cooperation and economic talks have not seemed to deter or dampen a rising furor over the disputed islands. The situation is particularly awkward for the United States because it is committed by its security treaties with Korea and Japan to defend both countries in the event of conflict. Thus, in the case of the Dokdo/Takeshima islands, the problem for Washington would be to decide whether to defend Korea or Japan. Or perhaps it would be the U.S. Army defending Korea and its claims and the U.S. Navy defending Japan and its claims. In the case of the Senkakus, the United States has not interest of its own in them and certainly no wish to go to war with China over them. But it is in effect being driven by the mayor of Tokyo (famously the co-author along with Sony co-founder Akio Morita of the book, The Japan that Can Say NO) into a position that could easily lead to a U.S.-China face off.

The rising tensions have actually introduced a higher element of risk into the supply chains and are a factor in the consideration by some companies of relocating some manufacturing back to the United States and to other non-Asian locations.

As similar developments did in 1909, these events also raise the question of whether rather than God’s diplomacy, trade is the devil’s workshop. Before the relatively recent Japanese, Korean, Taiwanese, and Chinese economic miracles, there was no discussion or interest in these god forsaken rocks and shoals in the western Pacific. Over the years, the United States has enabled these countries to become rich by trading with them, investing in them, and transferring technology to them. Indeed, Washington has acquiesced in an asymmetric trading relationship in which the United States played the role of buyer of last resort as these countries pursued export led growth strategies. As this trade made them rich, Japan, Taiwan, Korea, and China all became more nationalistically sensitive and aggressive about their claims no matter how materially insignificant.

It’s hard to say at this moment how things will work out. We just have to hope that Tom has it right this time about the supply chain thing.