War and Third-party Trade

Abstract

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

Conflict and cooperation with trade partners

“…For example, studies consider third-party trade either in terms of a relative reduction in opportunity costs (Martin, Mayer, and Thoenig 2008) or as a source of asymmetric dependence and vulnerability that could invite coercion (Barbieri 1996;Farrell and Newman 2019;Peterson 2011Peterson , 2014. Research also has examined the deterrent effect of third-party intervention in disputes (Aydin 2008(Aydin , 2010Dorussen and Ward 2010;Feldman and Sadeh 2018;Kinne 2012;Kleinberg, Robinson, and French 2012;Maoz 2009) and the effect of third-party trade on costly signaling (Kinne 2014), as well as the manner in which competition for markets could provoke hostilities (Chatagnier and Kavakli 2017;Peterson 2015). Studies similarly consider how broader economic integration -what is often called globalization and typically incorporates financial relationships as well as trade -influences a state's conflict-propensity (Gartzke and Quan 2003;Sadeh and Feldman 2020;Schneider 2014;Schneider and Schulze 2003).…”

Effects of Neighboring Nation Terrorism on Imports

“…The results are presented in Table 4. While conflict and terrorism might reduce bilateral trade between neighbors as we already show, it may also divert trade to third parties (Feldman and Sadeh, 2016;De Sousa et al, 2018…”

Globalization and wartime trade

“…5 In contrast, evidence on the effects of conflicts on trade with third-party states, which in aggregate may be greater by value than trade between opponents, is mixed. Some studies document an overall decline in wartime trade with third-party states, 6 while other studies emphasize the resilience of trade with third parties to conflict, because of substitution for lost trade with enemy states and third parties (Martin et al, 2008), 7 and strategic interests (Feldman and Sadeh, 2018; Gowa and Hicks, 2017). However, no study has so far examined how the externalities that globalization generates may affect the trade of even relatively less globalized participants in armed conflict.…”

“… 6. (Feldman and Sadeh, 2018; Glick and Taylor, 2010; Hegre et al, 2010; Long, 2008). Generally, the more restricted the coding of MIDs is to wars, the higher the proportional costs of MIDs. …”

“… 14. Baier and Bergstrand (2007), Baldwin and Taglioni (2006), Baldwin et al (2008: 39–42), Feldman and Sadeh (2018), Gowa and Hicks (2013, 2017) and Sadeh (2014). …”