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Economic Interdependence and Peaceful Power Transition
Unformatted Document Text:  7 of A to enter the game depends on how large the winset is and whether the benefits it gets is larger than the costs it incurs in breaking the current institution. The research identifies that challenger A is constrained by the economic interdependence when the interaction with B reaches a certain threshold. Exceeding this threshold might increase low-level conflict as some scholars attribute this to states’ use of economic and diplomatic tools to resolve demands; but it decreases high-level conflict because states are concerned about the destructive means of dispute resolution. This informs us that economic interdependence, especially trade is conducive to peaceful power transition. Most studies of the relationship between economic interdependence and conflict are referring to international economic linkages as solely trade. But we know that international economics is more than just trade. International finance among nations is also very important economic activity. Globalization has increased capital mobility and states may find capital controls less useful. Capital flow increases economic interdependence. Countries with open capital flows are more vulnerable to international financial crisis (Gourevitch 1986). If mobile capital between a challenger and the dominant state is very large in amount and frequent enough, for example, the challenger buys large amount of dominant’s government securities, it is less likely for the dominant state to initiate a preventive war as threatening to undersell the dominant state’s currency by the challenger will cause financial turmoil. A quick sell-off of these securities would send interest rates spiraling up, thus, give the challenger tremendous leverage over the dominant state. Likewise, the challenger is also constrained by such interdependence as the dominant state can devalue its currency and evaporate the foreign currency reserve of

Authors: Zhou, Xinwu.
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of A to enter the game depends on how large the winset is and whether the benefits it gets
is larger than the costs it incurs in breaking the current institution. The research identifies
that challenger A is constrained by the economic interdependence when the interaction
with B reaches a certain threshold. Exceeding this threshold might increase low-level
conflict as some scholars attribute this to states’ use of economic and diplomatic tools to
resolve demands; but it decreases high-level conflict because states are concerned about
the destructive means of dispute resolution. This informs us that economic
interdependence, especially trade is conducive to peaceful power transition.
Most studies of the relationship between economic interdependence and conflict are
referring to international economic linkages as solely trade. But we know that
international economics is more than just trade. International finance among nations is
also very important economic activity. Globalization has increased capital mobility and
states may find capital controls less useful. Capital flow increases economic
interdependence. Countries with open capital flows are more vulnerable to international
financial crisis (Gourevitch 1986). If mobile capital between a challenger and the
dominant state is very large in amount and frequent enough, for example, the challenger
buys large amount of dominant’s government securities, it is less likely for the dominant
state to initiate a preventive war as threatening to undersell the dominant state’s currency
by the challenger will cause financial turmoil. A quick sell-off of these securities would
send interest rates spiraling up, thus, give the challenger tremendous leverage over the
dominant state. Likewise, the challenger is also constrained by such interdependence as
the dominant state can devalue its currency and evaporate the foreign currency reserve of


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