Trade, Peace and Democracy: An Analysis of Dyadic Dispute

95 Pages Posted: 25 Jul 2006  

Solomon W. Polachek

State University of New York at Binghamton; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Carlos Seiglie

Rutgers University

Date Written: June 2006

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. Crosssectional 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.

Keywords: trade, conflict, cooperation, interdependence, gains from trade, dyadic dispute

JEL Classification: F01, F51, F59, D74

Suggested Citation

Polachek, Solomon W. and Seiglie, Carlos, Trade, Peace and Democracy: An Analysis of Dyadic Dispute (June 2006). Institute for the Study of Labor Discussion Paper No. 2170. Available at SSRN: https://ssrn.com/abstract=915360

Solomon W. Polachek (Contact Author)

State University of New York at Binghamton ( email )

Binghamton, NY 13902-6000
United States
607-777-2144 (Phone)
607-777-4900 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Carlos Seiglie

Rutgers University ( email )

Department of Economics
360 ML King Jr. Blvd.
Newark, NJ 07102
United States
973-353-5914 (Phone)
973-353-5259 (Fax)

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