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Trade, Peace and Democracy: An Analysis of Dyadic Dispute

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  • Polachek, Solomon

    () (Binghamton University, New York)

  • Seiglie, Carlos

    () (Rutgers University)

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 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.

Suggested Citation

  • Polachek, Solomon & Seiglie, Carlos, 2006. "Trade, Peace and Democracy: An Analysis of Dyadic Dispute," IZA Discussion Papers 2170, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp2170
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    Cited by:

    1. Shiro Armstrong, 2010. "Interaction between trade, conflict and cooperation : the case of Japan and China," Trade Working Papers 22766, East Asian Bureau of Economic Research.
    2. repec:ksp:journ3:v:4:y:2017:i:3:p:322-328 is not listed on IDEAS
    3. Murshed, S.M. & Mamoon, D., 2007. "On the Costs of Not Loving Thy Neighbour as Thyself," ISS Working Papers - General Series 18748, International Institute of Social Studies of Erasmus University Rotterdam (ISS), The Hague.
    4. Sylvanus Kwaku Afesorgbor, 2016. "Economic Diplomacy in Africa: The Impact of Regional Integration versus Bilateral Diplomacy on Bilateral Trade," Economics Working Papers 2016-09, Department of Economics and Business Economics, Aarhus University.
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    6. Mamoon, Dawood, 2017. "Beyond being Good Neighbors: Proximity to International Markets Matter More for India Pakistan Peace," MPRA Paper 83098, University Library of Munich, Germany.
    7. 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.
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    20. Lin Scott Y. & Seiglie Carlos, 2014. "Same Evidences, Different Interpretations – A Comparison of the Conflict Index between the Interstate Dyadic Events Data and Militarized Interstate Disputes Data in Peace-Conflict Models," Peace Economics, Peace Science, and Public Policy, De Gruyter, vol. 20(2), pages 1-26, April.
    21. 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.
    22. 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.
    23. 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.

    More about this item

    Keywords

    conflict; cooperation; interdependence; gains from trade; dyadic dispute; democratic peace; trade; democracy;

    JEL classification:

    • 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; Revolutions

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