Few studies explain how wars affect trade with third parties. We argue that wartime trade policies should raise trade with friendly and enemy-hostile third parties but reduce trade with hostile and enemy-friendly third parties. At the same time, the private motivation of firms and households may be incompatible with national wartime trade policies and constrain the effectiveness of wartime trade policies. Our directed dyadic data set consists of almost all of the states from 1885 to 2000. Running a high definition fixed effects regression with two-way clustering of standard errors, we find that hostile third parties tended to reduce trade with a combatant state by roughly 30 percent. In addition, trade with third parties friendly to the enemy fell by a similar magnitude. In contrast, on average, war hardly affected trade with third parties because of substitution of war-ridden markets with third-party business partners.The rapid growth in international trade and investments that took place since the end of the Second World War has inspired hopes for a more peaceful world. Such hopes were mainly based on the proposition that interdependent states have ever more to lose by initiating hostilities against each other because war disrupts trade. Serious
This study argues that the effect of third-party trade on dyadic conflicts is conditional on the naval power of both the potential conflict initiator and its target state. This conditional effect occurs mainly because naval power allows trade-integrated initiators to reduce their trade dependence on a given trade partner and its allies more easily. At the same time, the target’s naval power increases the costs that conflict inflict on the initiator’s trade. As maritime trade accounts for about 80 percent of world trade volume, naval capability has an important effect on combatant states’ ability to substitute trading partners during a conflict and to mitigate trade-related costs, thereby affecting the relationship between third-party trade and conflict. The findings of our statistical analyses support our theoretical expectation that the pacifying effect of third-party trade diminishes as the initiator’s naval power increases, yet increases as the naval power of the potential target increases.
This article argues that on balance globalization does not increase, and may even reduce, the opportunity cost of Militarized Interstate Disputes (MIDs), as measured by foregone merchandise trade. Specifically, globalization makes it easier for states to substitute trade partners, makes it difficult to employ trade sanctions, makes credit more available to states at conflict, and encourages trade-substituting horizontal Foreign Direct Investment (FDI) and sanctions-resilient vertical FDI. Hypotheses are supported using High Dimensional Fixed Effects regression, applied to a Gravity model, with two-way clustering of standard errors, and an analysis of the effect of globalization on the marginal effect of MIDs on international trade. This suggests that while wars are becoming infrequent in recent decades, due to other factors, trade’s contribution to peace is diminishing.
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