Defense Pacts and International Trade

Abstract

Theories of international political influences on trade maintain that shared alliance commitments affect bilateral commercial exchange. The most prominent of these suggests that trade produces a security externality threatening states, but that a military alliance alleviates these concerns, leading to greater trade among allies. Yet past empirical analyses produce inconsistent findings with respect to the effect of military alliances on bilateral trade levels. This article presents a new argument to explain the inconclusive findings in previous studies. The potential increase in military power from efficiency gains through trade is a positive security externality only when a commitment to defend one's alliance partner exists. In essence, cooperative security agreements that require states to give military assistance to each other if attacked (i.e. defense pacts) will lead to greater trade among their members than agreements in which the members promise neutrality, non-aggression, or consultation. The analysis distinguishes alliances that include commitments of defense from those that do not, and uses two different sources of alliance data to examine the effects of defense pacts on trade levels between major powers from 1885 to 1990. The results demonstrate that defense pacts are associated with higher trade among alliance members, but that trade between members of non-defense pacts is statistically indistinguishable from trade between non-allies. This article recognizes that a link between economic and security issues exists and emphasizes their mutual relationship.

Understanding Alliance Formation Patterns

“…He argues that "when designing empirical analyses, researchers include a much broader range of security agreements in the category of military alliance than necessary to capture the concept in their argument." 141 Long arrives at the same conclusion as we did in our hypothesis; among the different types of alliances-defense pact, neutrality and non-aggression pact, and entente-only the defense pacts meet the required indicators for a military alliance. "Namely those classified as defense pacts, obligate the members to provide military assistance to a partner in the event of an attack upon the partner's sovereignty and/or territorial integrity."…”

“…142 Thus, after narrowing down the model, Long finds statistical evidence that "defense pacts [between major powers from 1885 to 1990] are positively related to dyadic trade levels, and that their nondefense-pact counterparts are not significantly related to trade in a dyad." 143 Another possible explanation for the varying results of the alliance and trade relationship is dedicated to Long and Leeds, who argue that another factor is also complementary to the relationship between alliance formation and increased trade. They find empirical evidence that additional promises of economic cooperation prompt allies to trade more with each other than with states that have no economic ties to the allies.…”

Capability Change, Economic Dependence and Alliance Termination

“…This suggests that allied states have an incentive to trade more with allies than with non-allies because trade between allies can enhance the security of the alliance. Long (2003) found that variations in the type of alliance agreements explained the alliance-trade relationship. He found that defense pacts promote trade between allies, while other types of alliances did not.…”

Why Do States Sign Alliances?

“…Several scholars have argued, for example, that alliances lead to increased trade among members, both because government trade policies favor allies and because firms seek business ties with states that they believe are less likely to engage in conflict with their home state; this relationship has been particularly evident since World War II (e.g., Gowa & Mansfield, 1993;Long, 2003). Similarly, Li and Vashchilko (2010) find that alliances between high-income and low-income states result in higher levels of bilateral foreign investment.…”