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In months I have been writing this article I accumulated more debts than I can actually repay. This paper would be incomplete without thanking the following institutions and people, who have made my PhD studies a reality; first and foremost I would like to thank Chinese Scholarship Council (CSC) and Government Republic of Zambia for sponsoring my course, Bank of Zambia (BoZ), my employers, for giving me a paid study leave to come and pursue my studies here in China, and University of Xiamen for accepting me, Professor Biwu Zhang, for his tutorship and guidance and spending his time to review this script, whom I personally owe a lot, my supervisor, Prof. Huang Meibo for being firm on me, but kind. To my wife and children, I say many thanks for being patient and understanding. And lastly, all my lecturers, friends, WISE Institute and Economics Department staff whom I may not have a space to mention here individually. However, all the shortcomings of this Paper are entirely mine, and no person mentioned herein bears any responsibility for them.
Global peace is an ideal form of freedom, peace, harmonious atmosphere, and happiness among and within all nations and/or peoples. To other scholars, world peace is a utopian idea of planetary non-violence by which nations willingly cooperate, either voluntarily or by virtue of a system of governance which prevents warfare.
Some new theories and issues concerning promotion of global peace are going on in the world today. Rather than world trade being dependent on world peace, as in the past, world peace and harmony may be influenced and brought nearer to reality through burgeoning world trade unlike in the past theories where trade was a function of global peace. In this paper we argue that peace is the function of trade, that is to say that trade brings about peace. Hence being the beacon, of peace. Recent studies have developed this theme in the modern days. Here we condense and analyze various studies on this issue, into this article. It is common knowledge that global commerce thrives well during peacetime but here we argue that global peace thrives better during enhanced global trade. We should also understand the important role that trade and international marketing play in actually producing and procuring peace as a catalyst. International trade brings individuals and various entities together through the motivation of doing business interaction. And, all this interaction yields not just the mutual gain associated with business relationships – it also creates personal relationships and mutual understanding. These are the foundations of global peace and prosperity. In the modern times most theorists believe that “peace is the natural effect of trade,” however, a number of economists and political scientists firmly espouse the
notion that trade among nations leads to peace. If political conflict leads to a diminution of trade, then at least a portion of the costs of conflict can be measured by a nation’s lost gains from trade. The greater two nations’ gain from trade the more costly is bilateral (dyadic) conflict. This notion forms the basis of most theorists’ assertion regarding dyadic dispute and trade as espoused by liberal international theory.
This paper develops an analytical framework showing that higher gains from trade between two trading partners (dyads) lower the level of conflict between them. Cross sectional evidence using various data on political interactions confirms that trading nations cooperate more and fight less because they have everything to lose. And this confirms the notion that trade is indeed a beacon, of peace.
Keywords: International trade, beacon,
Global peace is an ideal form of freedom, peace, harmonious atmosphere, and happiness, among and within all nations and/or peoples (Barbieri, K. and G. Schneider 1999). To other scholars, world peace is a utopian idea of planetary non-violence by which nations willingly cooperate, either voluntarily or by virtue of a system of governance which prevents warfare. Although the term is sometimes used to refer to acessation of all hostility among all individuals, world peace more commonly refers to a permanent end to global and regional wars with future conflicts resolved through nonviolent means (Gasiorowski, M.and S. Polachek 1982).
While world peace is theoretically possible, some like the pessimists school believe that human nature inherently prevents it, as human nature is evil. This belief stems from the
idea that humans are naturally violent and evil, or those rational agents will choose to commit violent acts in certain circumstances. Others however believe that war is not an innate part of human nature, and that this myth in fact prevents people from reaching out for world peace.
If world peace is defined as the absence of hostility, violence and conflict, not just between countries and regions, but between individuals, world peace would imply a worldwide end to violence and to institutions which rely on threats of violence to sustain their existence. It follows that there could be no law enforcement, because force is a form of violence. Without law enforcement, there could be no laws, except those which everyone voluntarily agrees to follow. Finally, there could be no governments of the type that rely on threats of violence to collect taxes, maintain their borders, or govern their citizens. And this assumption consequently leads us to a utopian belief, which fails to hold in real life.
1.1 Globalization, Trade and Conflicts
Having conceptualized in general what global peace entails. The fundamental question to ask here, is that is global peace a reality, if so under which mechanisms can this be achieved? Some see a trend in national politics by which city-states and nation have unified in pursuance of trade, and suggest that the international arena will eventually follow suit. Many countries such as China, Italy, the United States, Germany and Britain have unified into single nation-states, with others like the European Union following suit, suggesting that further globazation will bring about a unified World Order. The resulting factor will be higher trade volumes and reduced conflicts. The force behind this rapid globalization is no other than trade, which is used as a medium and beacon of piece, as trade is actively bringing all people of different boundaries together. Subsequently every people have no choice but to live in harmony if they have to pursue further trade. There are more costs to conflicts than gains you obtain through trade.
The paper is organized as follows; in this section we have given a detailed introduction of the topic. In the next section we will talk about trade and divergence in its perspectives in section 2.0; this is followed by a discussion on economics model of the “Peace-Through-Trade”, Liberal hypothesis in section 3.0, and in section 4.0 we briefly illustrate the game-theory: signaling models, followed by observations from the trade-conflict model regarding the democratic peace and lastly the conclusion is given in section 6.0
2.0 Trade and divergence
Following a detailed introduction of the topic above, we will try to put trade and
conflicts into the right perspectives now.
It is been observed that Cuba has had a confrontational relations with USA and more cooperation relations with Russia for a long time now, and in the 1990s Cuba had seen a lot of dramatic trade cooperation from Canada which has strong relations with USA, because of this intertwinement of Cuba-Canada-USA relationship, USA and Cuba may eventually end up being allies in future. In this regard, studies have revealed that economic and political relations are intrinsically intertwined. In this section, we argue that the “trade and conflict” literature is motivated by this observation of this nature in reality. Any given country can be both cooperating with some countries and in a state of conflict with another set of nations at the same time. Furthermore, economic and political relations go hand-in-hand.
Aside from the countries mentioned above, there are countless other examples in this world (Neil R. Richardson, 2004). The question we want to address is why a particular country, like the United States has good relations with Canada yet poor relations with a country like Cuba; and why at the same time does a country like Cuba can have good relations with Canada, yet poor relations with the United States. Clearly looking at the uniqueness of only one country in isolation, rather than both the countries comprising the bilateral relationship (i.e., the dyad) would not provide a full answer. Nor would universal variables, i.e., variables common to the entire international political system provide an answer, since they would not be able to explain how cooperation and hostility coexist simultaneously between two members of the system. For this reason, at a minimum, it makes sense to concentrate on dyads rather than countries as the component of observation. In fact, this is precisely the approach of the conflict-trade literature, though now some have begun to extend the theory to incorporate many-sided situations. In essence what this trend among Cuba, USA and Canada is trying to show us in its general perspectives is that trade can be unifying factor among various countries. This is because if there was a conflict between Cuba and USA for instance, USA may fail to attack Cuba as Canada may act as a mediatory country between the two because of its trade relations it enjoys with Cuba and USA.
2.1 Defining Peace: A Trade Theory Perspective
In the context of dyadic relations, Solomon W. Polachek (2006) defines conflict as trade gone skewed. He argues that it is well known fact that nations (or for that matter other economic entities such as households) can raise their well-being through trade (if there is a difference in the relative prices each faces prior to trade). It results from gains due to specialization in production, which leads to higher levels of income and therefore greater consumption opportunities and from the prospect to exchange at the lower prices, even if the level of
production remains unchanged from its pre-trade level.
Empirical evidence indicates that gains from trade can be substantial. For example, Acemoglu et al. (2003) demonstrate that access to the Atlantic is responsible for the rise of (Western) Europe between 1500 and 1850, and this is especially true for nations engaged in long distance oceanic trade. But what happens when a particular economic entity’s gains from trade are not as high as it thinks it should receive? Often in such a circumstance the entity uses force to achieve redistribution through various means of coercion. Liberalists have argued that using force to coerce is also a form of conflict. Since force can be viewed as a type of trade, (“I’ll be violent if you don’t give me what I want”), conflict is a form, as well as symptom, of “trade gone awry” (Acemoglu et al. 2003) As such, and he argues that conflict occurs when parties fight over economic rents. When conflict lasts over a long period, it is known as protracted conflict. From a normative perspective, the control and eradication of conflict is an area of interest in the field of defense economics and peace science (Acemoglu et al. 2003). Economists and Liberal Theorists in this area study ways to achieve peace through eradication of conflict, while also exploring the more positive aspect of assessing its impact on society. But to control and eradicate conflict, one must know how and why inadequate trade gains come about. Therefore, with this observation of studying ways to achieve peace through eradication of conflicts leads us to the issue of obligation for peace.
2.2 Responsibility for Peace: A Lifelong Peace – Notions of a Stable Balance
International Relations studies, particularly liberalists have observed that eradicating
hostility and promoting cooperation is a significant step leading to peace. One method of thinning hostility and bringing about cooperation is by legalistic dictum often initiated by third parties. One of the most profound and diplomatic mediums of this is through trade. However, the problem is that attempts at peace imposed by others may be innately unstable, especially when the underlying differences originally separating the countries remain. For this reason, it seems reasonable that a viable peace is a natural peace based on mutual dependence and therefore trade enhances and facilitates this linkage. In his criticism of the Treaty of Versailles, Keynes (1920) argued that Germany be allowed to have economic relations with the rest of Europe or the prospects for peace would be dim. For example in The Economic Consequences of the Peace he writes “If we oppose in detail every means by which Germany or Russia can recover their material well-being, …we must be prepared to face the consequences of such feelings (Keynes 1920).” Solomon W. Polachek (2006) similarly argues that only through mutual dependence can equilibrium come about where peace remains solid and secure, so that neither party is motivated to change the status quo.
Therefore we can note that mutual dependence makes conflict more costly, and as such, it
increases incentives for cooperation. Probably many types of mutual dependence affect international relations. In many instances, political motivations form the basis of mutual dependence. When Willy Brandt became Foreign Minister in the Federal Republic of Germany in 1966, he developed the policy of Neue Ostpolitik,eventually leading to a 1970 agreement accepting the borders of Berlin. Henry Kissinger pioneered the policy of détente that led to a considerable reduction in U.S.-Soviet tensions; including the SALT I strategic arms reduction talks, and the “opening” of China leading to an anti-Soviet Sino American alliance (Solomon W. Polachek 2006).
However, underlying most of these instances of mutual dependence are economic considerations which are normally attained through trade among partners. Willy Brandt sought closer trading relations with Eastern Europe and the Soviet Union (Solomon W. Polachek 2006). According to Solomon W. Polachek (2006), this helped prop up the weak communist economies, but it also highlighted the contrasting wealth and poverty between the east and west and probably ultimately set the stage for reunification. Certainly from the Soviet perspective decelerating the arms race reduced the drain on social and economic resources, but equally America’s economic vulnerability to nuclear holocaust was unimaginable. Certainly from China, Kissinger and Nixon sought trade in one of the fastest growing world markets (Solomon W. Polachek 2006). Finally, more recently, mutual dependence based on economics served as justification for the European nations to come together to form the European Union.
In this article and particularly this section, we concentrate on economic interdependence and in particular what political scientists refer to as “vulnerability interdependence” in the international relations literature .This type of interdependence attempts to capture the cost of rupturing economic relations with another country. In fact, most quantitative studies of interdependence and conflict focus solely on economic aspects because economic aspects are more easily measured. As we will see later, most use bilateral trade (or some trade related measure such as trade share or a trade-relative-to-GNP statistic) as the measure for interdependence, but even this, is a simplification of issues. As will be explained, theory predicts “gains from trade” (relative gains) to be the most relevant indicator of
economic interdependence. However, because of the difficulty nature of measuring trade gains, almost all research uses some variation of trade level to measure mutual economic dependence. But before we jump to this conclusion, we scrutinize the trade (interdependence) – conflict model first to put us in a clearer perspective of the theory.
2.3 How Trade impacts on Conflict and Cooperation
As alluded to earlier in this article, the proposition that trade deters conflict
has roots as far back as the sixteenth century. First, theologian philosophers such as Erasmus (1981) realized that war was “bad.” Later, the French monk Crucé (1623) wanted international bodies to arbitrate international disputes. This point of view was later taken up by Rousseau (2005) who realized that using organizations designed to arbitrate disputes would bring nations closer through communication. Related to arbitration, Immanuel
Kant (Perpetual Peace: A Philosophical Sketch, 1795) argued that perpetual peace could be achieved through appropriate governance in which all means used to wage war should be prohibited in order to establish mutual trust among nations. And trade is seen as a long bridge to this. But whereas Kant believed mutual trust must be legislated, forty-five years earlier, in 1750, Baron de Montesquieu provided an economics approach to achieve mutual trust. He stated that “peace is the natural effect of trade” because “two nations who trade with each other become reciprocally dependent” leading to “their union … founded on
their mutual necessities” [(1900 , p. 316)].
Muchlater, British statesmen Cobden (1995, originally published in 1846), Bright (1883), as well as economists Angell (1913) and Viner (1937) espoused these same views. Perhaps, for this reason Hirschman (1945: v, xvi) emphasized ‘the politics of foreign trade’ by which he spelled out “the possibility of using trade as a means of political pressure … in the pursuit of power.” Cutting existing trade for political reasons reduces gains from trade, though these losses can be somewhat mitigated if other trading partners can be found. But even here, finding other trading partners is costly.
3.0 Economics Model of the “Peace Through-Trade” Liberal Hypothesis
3.1 Extensions of the Conflict-Trade Model.
A number of factors influence gains from trade. These include type of trade, country size, market competition, country contiguity, tariffs, foreign aid, and the number of countries in the international system and all these by implication lead to fewer conflicts among trading nations. Just recently, a number of authors have begun to examine some of these aspects of the conflict-trade relationship. A rise in trade generates cooperation among trading
nations and consequently lead to less conflicts (Polachek, S. W. (2002b).
Comparative advantage enables both countries to increase their welfare through trade. Thus trade is welfare enhancing creating both tangible and intangible products such as material well beings, peace and harmony. In this regard we define conflict to be an unfriendly political action from one country to another that is hostile enough to lead the second country to cease or at least diminish trade. Therefore no country is motivated to start conflict with any other trading partner at the expense of cooperation which may result in sour trade relationship. For the sake of trade every country stands to gain to maintain tranquility.
Polachek (1980, 1992) developed a framework to analyze the trade-conflict link. In his
model, a country’s preferences can be represented by a utility function over the consumption, C, of m-goods that are produced in a k-country world. Furthermore, each of these countries can initiate conflict or cooperation on any of the k-1 countries towards which the level of intensity is denoted by a 1x (k-1) vector Z. Preferences for the level of conflict or cooperation to achieve outcomes is deemed important by a country generating a derived demand for it. Furthermore, conflict has effects on the terms of trade or prices in
the world markets. Algebraically, the problem for the actor country is to maximize:
L =U(c1 ,c2 ,z)+λ[ p1q1 + p2 q2 – p1 c1 – p2c2 – pz z] , ……………(1)
by choosing the amount of consumption of the two goods and the level of conflict to initiate against the target country while taking into account the effects that this has on prices. One could think of the problem as being solved in two stages. In the first stage, individuals decide on the amounts to consume of the different commodities, yielding the composition of imports and exports. In the second stage, the government decides on the level of conflict, z, to undertake. We can rewrite the problem as
Max L =U(c1,c2 z) +λ[ p1 x1 + p2 m2 –pzz] , …………………………….(2)
exports, x1 = q1 –c1 and imports, m2= q2 –c2 .
In other words, we assume that conflict directed towards the other country reduces or has no impact on the price the country obtains for its export commodity and increases or has no impact on the price the country pays for its imported goods. Greater conflict by the actor towards the target requires the actor to reduce the price of their exports to induce them to purchase the good and leads to them being charged a higher price for the imports from the target country.
The problem for the actor country is to maximize equation (1) above subject to their resource constraint and the country’s level of technology. Obviously, the greater the welfare loss the greater the costs of conflict, and the greater the incentive for cooperation, independent of the country’s innate preference for peace. Even if conflict does not directly diminish trade, but instead leads to trade restrictions that ultimately affect the terms of trade, the same result applies. In this case, less desirable terms of trade result, implying a new equilibrium and lower welfare. Again, the implicit price of conflict is the lost welfare associated with diminished trade brought about by conflict.
3.2 Foreign Direct Investment (FDI)
Not only is trade increasing, but the amount of capital flows is as well increasing.
As global integration has expanded, countries have moved into a more complicated interdependent network. FDI’s annual growth rate exceeded the growth of international trade over the past decade and broke through the trillion U.S. dollar level in 2000 (Solomon W. Polachek 2006). This contrasts with the period of the 1960s and 1970s when countries were concerned with the possibility that their sovereignty would be reduced by multinational FDI, mercantilist approach. The focus now is on the positive effects of FDI and other types of capital flows on the home and host countries’ economies. This change in attitude was complemented by the adoption of favorable policies by many countries to attract FDI which did away with the static mercantilist approach. These developments raise the possibility that the role of FDI in determining interstate relationships has increased in significance. Research on the impact of foreign investments by multinational corporations (MNCs) on the international system predates the recent increase in globalization.
The more conventional literature [Vernon (1971), Gilpin (1975) and Nye (1974)] takes the view that MNCs are tied to their home countries and that nation states are still the principal actors in the international system. However, if multinational firms are essentially national firms competing with one another around the globe, as Gilpin (2001) points out, then one would expect some correlation between the direct investments of multinationals and the foreign policy of their home countries.
There is now a body of literature examining the determinants of FDI. But FDI’s effect on international relations is still at its infancy. Thompson (2003) argues that FDI draws countries closer to each other thereby decreasing the probability of deadly conflicts. In empirical work using post World War II data, he illustrates that reciprocal FDI flows leads to fewer instances of conflict. Using the current political environment he argues that United States, China, and Taiwan are drawn closer together because of FDI flows between the countries instigates the necessity of corporation in order to maintain stability. Further, China has a lot of equity flows in USA as foreign debt, a situation that has helped to mitigate the balance of payment deficit problems in USA and enhanced international relations between the two nations, in this regard no country in its right frame of mind may think of engaging in conflict with China.
Based on information from World War I, Thompson argues that the warring countries had little or no FDI leading to diminished amalgamation. In a sense this latter finding helps to explain the paradox that if trading nations participated in World War I, as conflict-trade theory argues then trade should have deterred conflictive activity.
4.0 Game-theory: Signaling Models
In the typical game theory model, parties vie to split contested resources and therefore call for either cooperation or defection among nations. As already alluded to, trade produces gains, which must be divided between two (or more) trading partners. Accordingly, trade gains become the contested resource and game theory is invoked to determine how each party behaves to determine the division. But, in the process of dividing a given resource, it becomes obvious that what one party gains, the other loses, leading to what is called in theories of international relations as zero sum game, so that the process itself has a conflictive nature. In fact, Schelling (1960) and later on Hirshleifer (1995) view conflict in this manner.
Thus to game theorists the logic is simple: first, trade creates trade gains; second, trade gains must be divided; finally, dividing trade gains leads to conflict. Following the logic through, trade leads to conflict . Again there is no contradiction with the liberal trade-conflict model which states that trade yields more cooperation than conflict. Two issues are involved here: whether dividing trade gains necessarily yields conflict as game theoretic models imply, and whether the conflict emanating from splitting trade gains outweighs the necessary cooperation needed to protect the trade, which created the gains in the first place.
5.0 Observations from the Trade Conflict Model Regarding the Democratic Peace
Two theories are given to explain why democracies rarely fight each other. This can also implicitly attest to the fact that in real life we have seen how big the volume of trade between two democracies is. However, empirical evidence also shows how non democracies and democracies trade volumes have inclined to be higher than what the theory predicts such as the trade between USA and China. Therefore, the first theory is billed as cultural-normative, and the second as structural. In reality both are related because in part structural determinants are possibly culturally induced. Cultural normative theories are based on Kant(1795), Wright (1942), and Doyle (1986), and advanced by Russett (1989) and others. They claim that adjudication and bargaining are so embedded within democratic societal norms that democracies are able to solve disputes peacefully, especially with other democracies even though recent evidence show to the contrary like the trade between China and USA.
Structural school, advanced by Morgan and Campbell (1991), and based on Rummel (1979a), Hagan (1987), Domke (1988), and Bueno de Mesquita and Lalman (1992), argue that there are so many checks and balances in the democratic decision procedure that make the resort to fighting difficult. Though one might have difficulty using this logic to explain why democratic actors don’t fare much better against non-democratic targets than non democracies. It is argued that non-democracies such as dictatorships need less justification to go to war. Zinnes (2004) uses propositional calculus to provide an explanation based on normative as well as the structural factors.
Characterizing these two theories requires separating identifiable structural distinctiveness defining decision constraints which explain why democracies rarely fight each other and therefore tend to have huge trade flows among the trading democracies. Failing to find such characteristics would lead one to conclude in favor of innate cultural/normative characteristics of democracies and spurious conclusions.
Before turning to the conflict among democracies question, we attach this issue to the past results relating trade and conflict: To be applicable, one would have to show that democratic
dyads exhibit greater trade (or greater gains from trade) than nondemocratic dyads, and that as a consequence the greater trade contributes to greater cooperation and the less conflict. Democracies cooperate more and conflict less to protect greater welfare levels arising from trade gains.
By cooperating rather than fighting, trade is protected and individual welfare is maximized by per capita increases in GNP attributable in part to these gains from trade. To test the validity of this scenario one must illustrate first that democratic dyads in fact trade more, and show second that this greater trade is related to lower amounts of conflict.
Consistent with the above hypothesis, democratic dyads exhibit far greater levels of trade and cooperation. The mixed dyads have higher trade levels in between. This might be somewhat puzzling to the above hypothesis that trade is directly related to conflict since as one would expect conflict to be in between the purely democratic and purely non-democratic dyads.
Other factors relating to this are country size and multilateral interactions. The larger the country is the bigger the size of trade volumes and this subsequently lead to reduced conflicts among nations, partially this can explain the huge volume of trade between China and USA. On the other hand multilateral interactions also enhance trade volume in that bilateral trade is not independent of other countries. Feng (1994) relates trade to alliance conflict. He finds that the relationship between trade and alliance conflict depends upon what he calls externality cost. As such, post-World War II trade between the United States and an ally (e.g., Britain, Canada, France, West Germany, Italy and Japan) increased in direct proportion to conflict between the United States and Soviet Union. How alliances form and how third parties intervene in ongoing conflicts form a large political science literature. In this vein, Altfield(1984), Morrow (1991), Powell (1991), and Simon and Gartzke (1996) among others base alliances on security gains from joining a coalition. Altfield and Bueno de Mesquita (1979) use an expected-utility model to predict that intervention depends on the utility gained from one or the other party winning. As such intervention is more likely if a third party gains considerable utility from one country winning, instead of another. Therefore, one can incorporate multilateral interactions into the conflict-trade framework described above.
The proposition that international trade specifically, and economic interdependence in general reduces conflict between nations has a long tradition in the history of economic thought and now that of international relations. The argument proposed is that trade leads to welfare gains that countries do not want to put in jeopardy, losing it by engaging in trade-disruptive activities such as wars or other forms of conflict. Thus far, until fairly recent times economists have not applied some of the modern tools of economics to explore this proposition though scholars from international relations have endeavored. This is surprising given the large cost to society of diverting resources towards a purely predatory or redistributive motive instead of productive activity. Given the slow pace of economic development in large parts of the world ravaged by conflict, and the dim prospects of a convergence of their income with those of the developed world, it seems the incentives to explore this topic is of some urgent.
Our appraisal of the empirical literature on the conflict-trade relationship indicates that researchers use several different historical data sets to gauge conflict. In this regard, the paper has shown that overwhelming evidence indicates that trade reduces conflict regardless of the proxies used to measure the gains from trade and conflict.
Our inclination is for using events data because this data contain both information on conflict, as well as on cooperation between nations. As such, it allows for exploring a range of international interactions and not just the extreme endpoint of outright war. We also note that recent empirical results show that FDI plays a similar role as trade in affecting international interactions. More specifically, we find that the flow of FDI has reduced the degree of international conflict and encouraged cooperation between dyads. This is an especially important result since one of the main characteristics of globalization has been the reduction of barriers to international capital flows and as a consequence the amounts of capital and equity flows have expanded enormously dwarfing potential conflicts. Furthermore, we conclude that to a large extent the observed evidence that has been found that democracies are less prone to fight with other democracies can be explained by accounting for the larger trade relationship between democracies.
The policy implication of our finding is that further international cooperation in reducing barriers to both trade and capital flows can promote a more peaceful world. Additionally, efforts at democracy while laudable should not have the expected appeasing effects between neighbors unless the appropriate institutions are developed simultaneously to promote trade and capital flows between nations. It is by this vehicle that resources will be freed to address more urgent needs in the international system.
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