| Summary: | Why does a reigning great power maintain trade ties with a military challenger, knowing that the gains from trade contribute to the challenging power's military ascendance? Why does a reigning state not supplement military balancing by reducing its trade ties with a challenging state? This dissertation addresses this puzzle by offering a theory that explains the conditions under which a reigning power decides to maintain (or abandon) extant commerce with a challenging power while balancing against that country militarily. This theory suggests that the nature of bilateral trade and the structure of international commercial relationships jointly constrain the reigning power's economic options vis-a-vis the challenging power. First, when the reigning power's leading industries depend heavily on economic inputs from the challenger to enhance their allocative and productive efficiency and market competitiveness, restricting bilateral trade would inflict significant damage on the reigning power's own economic capacity. Second, if alternative partners exist for the challenging state to replace the reigning state's position in its foreign commerce, then abandoning trade would have only a limited impact on the challenger's economic performance.
When these two conditions are present, and bilateral trade is restricted, the reigning state risks losing more economic capacity than the challenging state. Accordingly, without the trade ties, the reigning state's relative power position vis-a-vis the challenger would be weakened. It follows that, in an attempt to maximize its own power, the reigning state would maintain commercial ties with the challenging state. Only when its leading industries' dependence on challenger's economic inputs is low and no alternative trading partners exist for the challenging state, can the reigning power inflict relative losses on the challenger by abandoning bilateral trade. Thus, the reigning state would restrict trade with the challenging state in order to complement military counterbalancing only in limited circumstances.
Drawing on original archival research in the United Kingdom and the United States, my theory is tested through case studies of relations between reigning powers and challenging powers since the late nineteenth century: (1) Britain's response to the German challenge between 1898 and1914, (2) the U.S. response to Imperial Japan between 1939 and 1941, (3) the U.S. response to the Soviet Union between 1947 and 1950, (4) the U.S. response to the USSR during the Carter administration between 1979 and 1980, and (5) the U.S. reaction to the USSR during the Reagan administration between 1981 and 1982. Moreover, I use my theory to examine the U.S. reaction to the Chinese challenge in the West Pacific since the late 2000s. In each case study, I pit my theory against two alternative explanations: one emphasizes the role of domestic interest groups, and the other focuses on the use of economic inducements.
The case studies above suggest that the reigning powers behaved much as my theory predicts. Britain decided to maintain trade ties with Wilhelmine Germany despite intensifying military tensions because restricting trade would have inflicted greater harm on itself. Similarly in line with my predictions, the U.S. was able to effectively sever its trade ties with Imperial Japan before the Pacific War and the Soviet Union in the early stages of the Cold War as it could inflict relative losses on both adversaries. Meanwhile, two U.S. administrations subsequently responded to the resurgent Soviet threat in diverging ways---these divergent responses reflected different assessments regarding the U.S. ability to impose losses on the USSR. I conclude that the variations in my two explanatory factors are what constrained British and U.S. decisions toward their challenging powers. I also find that persuasive evidence in support of competing theories is largely absent.
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