Make Trade not War?
AbstractThis paper analyses theoretically and empirically the relationship between trade and war. We show that the intuition that trade promotes peace is only partially true even in a model where trade is beneficial to all, war reduces trade and leaders take into account the costs of war. When war can occur because of the presence of asymmetric information, the probability of escalation is indeed lower for countries that trade more bilaterally because of the opportunity cost associated with the loss of trade gains. However, countries more open to global trade have a higher probability of war because multilateral trade openness decreases bilateral dependence to any given country. Using a theoretically-based econometric model, we test our predictions on a large dataset of military conflicts in the period 1948-2001. We find strong evidence for the contrasting effects of bilateral and multilateral trade. Our empirical results also confirm our theoretical prediction that multilateral trade openness increases more the probability of war between proximate countries. This may explain why military conflicts have become more localized and less global over time.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5218.
Date of creation: Sep 2005
Date of revision:
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Other versions of this item:
- F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies
- F15 - International Economics - - Trade - - - Economic Integration
This paper has been announced in the following NEP Reports:
- NEP-AFR-2005-09-29 (Africa)
- NEP-ALL-2005-09-29 (All new papers)
- NEP-INT-2005-09-29 (International Trade)
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