Bilateral Trade in the Shadow of Armed Conflict

Abstract

Does the shadow of war decrease trade? I examine the influence of conflict on bilateral trade and argue that trading firms' expectations of armed conflict, both within and between nation-states, should decrease trade along with armed political violence. By assuming that firms care about future profits and assess the likelihood of a domestic or interstate conflict in the future that could disrupt trade, I argue that increasing the expectation of a domestic or interstate conflict raises the transportation, transaction, and production costs of trade. Empirically, contemporaneous trade levels should be negatively related to trading firms' beliefs about the likelihood of domestic and interstate conflicts in the future. Statistical tests, using bilateral trade data from 1984 to 1997, show that expectations of domestic or interstate conflict, in addition to violent armed conflicts, are negatively correlated with bilateral trade levels. Theoretically and empirically, this research advances our understanding of the trade-conflict relationship by demonstrating how trading firms' expectations about future conflict reduce bilateral trade levels.Does the ''shadow of war'' decrease trade? Previous research explains the inconsistent influence of militarized interstate conflict on bilateral trade by invoking the rational-expectations hypothesis. Rational traders may anticipate interstate conflict by observing hostility prior to military conflict and lessen their commercial exchange between countries when conflict is likely (Morrow, Siverson, and Tabares 1998;Morrow 1999). Li and Sacko (2002) find indirect support for the rational expectations claim; they find that militarized interstate conflicts do not decrease bilateral trade when the probability that conflict will occur is high. While the rational-expectations hypothesis suggests that firms' beliefs about the likelihood of conflict should be a significant determinant of observed patterns of international trade, direct evidence of the influence of the ''shadow of war'' on bilateral trade has not been shown empirically. I examine how firms' expectations of armed conflict reduce trade and evaluate how much influence these expectations have on bilateral trade levels.

Corruption and political stability: Does the youth bulge matter?

“…The fundamental difference between a terrorist campaign and a civil war is that the former does not hold and manage territory within a nation state. 6 The ICRG internal conflict index is also used in a large number of studies on political stability (e.g., Gupta et al, 2004;Jinjarak, 2009;Bjorvatn and Farzanegan, 2013, 2015, Long, 2008Neumayer, 2004;Lessmann, 2016). We have also examined our hypothesis by using an objective measure of conflict, namely, the maxintyearv413 variable in the UCDP Monadic Conflict Onset and Incidence Dataset (Themnér andWallensteen, 2014 andGleditsch et al, 2002).…”

Addressing Endogeneity in Actor-Specific Network Measures

“…Our second example draws on the work by Long (2008), who argues that bilateral trade decreases in anticipation of conflict, as looming conflict is an indication of an upcoming spike in the costs of transportation, transaction, and production. Long's theoretical model includes a set of additional covariates of bilateral trade, including the strength of diplomatic ties.…”

“…Along with most of the IR literature, Long (2008) obtains the data on weighted S scores from the EUGene program (Bennett and Stam 2000). Generating predicted S scores to replicate Long (2008), therefore, requires that we also follow the same procedure of calculating S scores as the EUGene data.…”

“…Long's theoretical model includes a set of additional covariates of bilateral trade, including the strength of diplomatic ties. Arguing that states with good diplomatic relations may engage in greater levels of trade, Long (2008) includes this effect in the empirical model, operationalizing diplomatic relations as dyad-specific weighted S scores of alliance portfolios. A possible issue here is that state A's choice of trade partners may be nonindependent from its alliance commitments: relative security concerns, for example, may dictate that states trade within rather than outside of their security alliances (Gowa 1995).…”

“…Multiple empirical tests of the trade-conflict relationship, including simultaneous estimation, provide support for both arguments, suggesting that the relationship is endogenous. We explore this endogenous relationship by replicating Maoz et al (2006), Desmarais (2011), andLong (2008). The first two studies examine how trade structural equivalence scores affect conflict, while the third includes alliance similarity when predicting bilateral trade flows.…”