Will Today's Global Trade Wars Lead to WORLD WAR III? THE SPLINTERING OF INTERNATIONAL ECONOMIC INTERDEPENDENCE IS A WORRYING SIGN FOR PEACE THROUGH TRADE.

• Author: Drezner, Daniel W.

YOU MIGHT NOT know about a minor trade skirmish in the Balkans that started late last year. But you should, because it signals a worrying shift in how national security considerations are altering the fabric of globalization in ways eerily similar to how they did at the dawn of the 20th century. That first shift helped start World War I, so in case you're wondering, yes, I'm going there: The current rise in protectionism could be the precursor to World War III.

The story starts in 2008, when the small southeast European nation of Kosovo unilaterally declared independence from Serbia after nearly a century of being bound to its larger neighbor, followed by a war for secession that ended only after NATO intervened. The Serbian government refused to recognize the breakaway province and, as part of this diplomatic position, late last year successfully pressured members of Interpol to not admit its former territory as a member.

In response, Kosovo decided to impose a 10 percent tariff on Serbian imports. As the dispute escalated, it raised the tariff rate to 100 percent, even though Serbia is the country's most important trading partner. Both the United States and the European Union pressed Kosovo to drop the tariffs and negotiate a reduction in tensions. Instead, its government widened the levies to include Bosnia and Herzegovina, since that country also does not recognize Kosovo's independence.

Kosovo's actions clearly violate the Central European Free Trade Agreement, which includes all three countries. Despite this, and despite the obvious costs of the tariffs, Kosovo has refused to back down, triggering a near-total collapse in trade between the countries that used to be part of Yugoslavia. Even if this particular trade dispute is resolved, a larger challenge remains: The Kosovar government's explicit aim is to reduce its economic dependence on its former occupier. So far, it's been successful; imports fell by 99 percent from a year earlier.

This is the kind of kerfuffle that causes world-weary observers of international affairs to shrug their shoulders and say, "the

Balkans" with a knowing smile. That would be fair enough if not for the deja vu it inspires among attentive students of economic history.

In the first decade of the 1900s, it was the newly independent Serbia taking actions to try to reduce its economic dependence on the Austro-Hungarian empire. The country increased its imports from France and signed a customs union with Bulgaria. In 1906, Austria-Hungary responded by slapping high tariffs on Serbia's chief export: pork. The "Pig War" lasted another five years, during which time Serbia painfully weaned itself from economic dependence on the Habsburg empire. Austria-Hungary's share of Serbian trade fell from 90 percent to 30 percent.

The Pig War prompted Austria-Hungary to annex Bosnia and Herzegovina, a move that escalated tensions with Russia--and sowed the seeds for the assassination of Archduke Franz Ferdinand in June 1914 by a Bosnian Serb.

Economic closure in the Balkans did not ignite the First World War. It did make the kindling that much easier to spark, however.

Is this more than just a casual historical parallel? Iam beginning to worry it is. To be clear, I'm not saying that (another) war to end all wars is imminent. But it's important to understand the role that economic interdependence played in the run-up to that conflict.

Before the First World War started, powers great and small took a variety of steps to thwart the globalization of the 19th century. Each of these steps made it easier for the key combatants to conceive of a general war.

We are beginning to see a similar approach to the globalization of the 21st century. One by one, the economic constraints on military aggression are eroding. And too many have forgotten--or never knew--how this played out a century ago.

THE CAPITALIST PEACE

A CENTRAL TENET of the liberal approach to international relations is that economic interdependence reduces the likelihood of war. While the "democratic peace" is more widely known, the last 30 years have seen an explosion of research into what's come to be known as the "capitalist peace" or "commercial peace."

Proponents of this hypothesis offer multiple reasons commercial activity fosters harmony. For some, the development of free markets reduces the profit motive for territorial expansion. For others, it's that exposure to global capital markets forces states to act in a less bellicose manner because they worry about a cross-border exodus of money and investors.

A third camp says high degrees of economic interdependence increase the incentive to reduce conflict through nonviolent means. And some researchers think, "Why choose?" and argue that all of these factors are interlocking. Some scholars of the capitalist peace go so far as to claim that the pacifying power of markets is what actually explains the democratic peace. These propositions are debatable, but there is an awful lot of evidence that something is going on.

No international relations theory is perfect, and the Achilles heel of the commercial peace hypothesis has long been the outbreak of the First World War. The stylized facts are well-known: Economic globalization seemed to be at its peak in 1914, with trade levels having surged across Europe in the previous half-century. Great Britain and Germany were each...