Journal Article

Make Trade Not War?

Philippe Martin, Thierry Mayer and Mathias Thoenig

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 75, issue 3, pages 865-900
Published in print July 2008 | ISSN: 0034-6527
Published online July 2008 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/j.1467-937X.2008.00492.x
Make Trade Not War?

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This paper analyses theoretically and empirically the relationship between military conflicts and trade. We show that the conventional wisdom that trade promotes peace is only partially true even in a model where trade is economically beneficial, military conflicts reduce trade, and leaders are rational. When war can occur because of the presence of asymmetric information, the probability of escalation is 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 and the cost of a bilateral conflict. We test our predictions on a large data set of military conflicts on the 1950–2000 period. Using different strategies to solve the endogeneity issues, including instrumental variables, we find robust evidence for the contrasting effects of bilateral and multilateral trade openness. For proximate countries, we find that trade has had a surprisingly large effect on their probability of military conflict.

Keywords: F10; F51

Journal Article.  16902 words.  Illustrated.

Subjects: International Trade ; International Relations and International Political Economy

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