Does Trade Promote Peace?

A new working paper weighs in on this longstanding debate. The results are somewhat surprising, I can't wait to see the details. Interestingly, according to the NYTimes, EU countries are blocking EU companies from taking over other EU firms. Economic Nationalism is simply not consistent with Monetary Union.

Regional trading blocs are likely to promote peace within a region, but multilateral trade organizations, such as the WTO, may actually increase conflicts. Since the 1960s, the growth of bilateral trade reduced the probability of war by 9%, but at the same time the growth of multilateral trade increased the probability of a local conflict by 25%, so the overall probability of war increased by 16%. The growth of trade also contributed to change the nature of war, from “world” wars to more localized conflicts. This depends on the fact that the cost of war is large for two countries with intense bilateral trade, while it is significantly lower for two countries with many trading partners.

The relationship between trade and war has long been debated. Empirical studies have had fairly naïve approaches in evaluating it. This paper rigorously examines the trade-war link within a structural model accounting for the effects of many factors. The results of this approach challenge the received wisdom that trade is “always good for peace”, and provide new insightful implications.

Abstract: This 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.