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Trade, Peace and Democracy: An Analysis of Dyadic Dispute

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  • Polachek, Solomon W.
  • Seiglie, Carlos

Abstract

At least since 1750 when Baron de Montesquieu declared "peace is the natural effect of trade," a number of economists and political scientists espoused the notion that trade among nations leads to peace. Employing resources more efficiently to produce some commodities rather than others is the foundation for comparative advantage. Specialization based on comparative advantage leads to gains from trade. 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' gains from trade the more costly is bilateral (dyadic) conflict. This notion forms the basis of Baron de Montesquieu's assertion regarding dyadic dispute. This chapter develops an analytical framework showing that higher gains from trade between two trading partners (dyads) lowers the level of conflict between them. It describes data necessary to test this hypothesis, and it outlines current developments and extensions taking place in the resulting trade-conflict literature. Cross-sectional evidence using various data on political interactions confirms that trading nations cooperate more and fight less. A doubling of trade leads to a 20% diminution of belligerence. This result is robust under various specifications, and it is upheld when adjusting for causality using cross-section and time-series techniques. Further, the impact of trade is strengthened when bilateral import demand elasticities are incorporated to better measure gains from trade. Because democratic dyads trade more than non-democratic dyads, democracies cooperate with each other relatively more, thereby explaining the "democratic peace" that democracies rarely fight each other. The chapter then goes on to examine further extensions of the trade-conflict model regarding specific commodity trade, foreign direct investment, tariffs, foreign aid, country contiguity, and multilateral interactions.

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This chapter was published in:

  • Keith Hartley & Todd Sandler (ed.), 2007. "Handbook of Defense Economics," Handbook of Defense Economics, Elsevier, edition 1, volume 2, number 1, 00.
    This item is provided by Elsevier in its series Handbook of Defense Economics with number 2-31.

    Handle: RePEc:eee:hdechp:2-31

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    Web page: http://www.elsevier.com/wps/find/bookseriesdescription.cws_home/BS_HE/description

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    Keywords: Defense in a Globalized World;

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    Cited by:
    1. Scott L. BAIER & Jeffrey H. BERGSTRAND & Peter EGGER, 2009. "The Growth Of Regional Economic Integration Agreements And The Middle East," Region et Developpement, Region et Developpement, LEAD, Universite du Sud - Toulon Var, vol. 29, pages 11-30.
    2. Polachek Solomon W, 2011. "Current Research and Future Directions in Peace Economics: Trade Gone Awry," Peace Economics, Peace Science, and Public Policy, De Gruyter, vol. 16(2), pages 1-14, January.
    3. Mamoon, Dawood & S. Mansoob, Murshed, 2008. "On the Conflict Mitigating Effects of Trade: The India-Pakistan Case," MPRA Paper 10431, University Library of Munich, Germany.
    4. Seitz, Michael & Tarasov, Alexander & Zakharenko, Roman, 2013. "Trade Costs, Conflicts, and Defense Spending," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 404, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    5. Jha, Saumitra, 2008. "Trade, Institutions and Religious Tolerance: Evidence from India," Research Papers 2004, Stanford University, Graduate School of Business.
    6. Shoro Armstrong, 2010. "Interaction Between Trade, Conflict And Cooperation: The Case Of Japan And China," Asia Pacific Economic Papers 386, Australia-Japan Research Centre, Crawford School of Public Policy, The Australian National University.
    7. Murshed, Mansoob & Mamoon, Dawood, 2008. "The consequences of Not Loving thy neigbor as Thyself: Trade, democracy and military explainations behind India Pakistan rivalry," MPRA Paper 10429, University Library of Munich, Germany.
    8. Caruso Raul, 2011. "On the Nature of Peace Economics," Peace Economics, Peace Science, and Public Policy, De Gruyter, vol. 16(2), pages 1-13, January.
    9. Mamoon, Dawood & Murshed, S. Mansoob, 2007. "Politics Remains but Economics Leads and Peace Follows: Making a Case for India-Pakistan Peace Process in line with China Model," MPRA Paper 3075, University Library of Munich, Germany.
    10. Dawood Mamoon & S. Murshed, 2010. "The conflict mitigating effects of trade in the India-Pakistan case," Economics of Governance, Springer, vol. 11(2), pages 145-167, April.
    11. Murshed, S.M. & Mamoon, D., 2007. "On the costs of not loving thy neighbour as thyself: the trade, democracy and military expenditure explanations behind India-Pakistan rivalry," ISS Working Papers - General Series 18748, International Institute of Social Studies of Erasmus University Rotterdam (ISS), The Hague.
    12. Vincenzo Bove & Leandro Elia & Petros G. Sekeris, 2013. "U.S. Security Strategy and the Gains from Bilateral Trade," Working Papers 1302, University of Namur, Department of Economics.

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