Chan, Steve

Abstract
In conducting research, international relations scholars typically seek to confirm their empirical expectations (or hypotheses). This paper adopts the opposite approach, focusing on the unexpected to highlight what is likely to be more informative for theory and policy. Specifically, it discusses the seeming puzzle from the neorealist perspective that China and the U.S. have become a very large creditor and debtor (respectively) to each other. Why would these two potential adversaries want to enter this relationship if it can have significant security externalities? That is, if security concerns should always trump economic interests, why would they knowingly expose themselves to the risk of loan boycott or debt repudiation that can be used as a leverage to advance a country’s political agenda and military position? I argue that this phenomenon signifies mutual reassurance to maintain cordial relationship. Heavy international loan/debt signals credible commitment because both parties can clearly anticipate the severe consequences should their political and economic ties become destabilized. In contrast to various realist formulations that focus on relative national capabilities and power shifts, this paper directs attention to how analysts may discern states’ preferences and intentions by examining the extent to which they are willing to undertake costly commitments. These commitments to maintain good relations are credible to the extent that the parties arrange self-enforcing deals entailing severe ex ante costs should either side engage in opportunistic behavior.
Read full article here