Does third-party trade reduce conflict? Credible signaling versus opportunity costs

The study of trade and conflict has largely focused on dyadic interdependence, or trade within discrete pairs of states. Yet, states may also be indirectly interdependent, by way of trade to third parties. This paper examines the influence of third-party trade on dyadic conflict initiation. I argue that certain structures of trade provide economically invested third parties with (1) an incentive to discourage dyadic conflict between a potential initiator and a potential target, and (2) the means to show disapproval of conflict by sending trade-based signals of resolve. The argument thus emphasizes the ability of third parties to introduce novel ex post information into bargaining dynamics, causing potential aggressors to reconsider their conflict strategies. Empirical analysis shows that, in fact, when a given dyad shares the sort of trade structures that enable costly signaling by third parties, the probability of conflict initiation declines substantially. In contrast, when third-party trade merely increases a potential initiator’s opportunity costs for conflict, conflict behavior remains unchanged.