Trade, Peace and Democracy: An Analysis of Dyadic Dispute
AbstractAt 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 wisely to produce one commodity rather than employing them inefficiently to produce another 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' gain from trade the more costly is bilateral (dyadic) conflict. This notion forms the basis of Baron de Montesquieu's assertion regarding dyadic dispute. This paper 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 paper 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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Bibliographic InfoPaper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2170.
Length: 95 pages
Date of creation: Jun 2006
Date of revision:
Publication status: published in: T. Sandler and K. Hardley (eds.), Handbook of Defense Economics Vol. 2, Elsevier 2007
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Other versions of this item:
- Polachek, Solomon W. & Seiglie, Carlos, 2007. "Trade, Peace and Democracy: An Analysis of Dyadic Dispute," Handbook of Defense Economics, Elsevier.
- F01 - International Economics - - General - - - Global Outlook
- F51 - International Economics - - International Relations, National Security, and International Political Economy - - - International Conflicts; Negotiations; Sanctions
- F59 - International Economics - - International Relations, National Security, and International Political Economy - - - Other
- D74 - Microeconomics - - Analysis of Collective Decision-Making - - - Conflict; Conflict Resolution; Alliances
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-07-02 (All new papers)
- NEP-INT-2006-07-02 (International Trade)
- NEP-POL-2006-07-02 (Positive Political Economics)
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