Military alliance and international trade: Evidence from NATO enlargement

Abstract

This paper exploits the three eastward expansions of NATO after the Cold War as a quasi‐natural experiment to investigate the relationship between military alliance and trade. To identify the impact of alliance membership on trade, we adopt the difference‐in‐differences method to estimate a gravity model with global bilateral trade data from 1995 to 2015. The results show that joining NATO has a positive effect on new member countries' exports, as well as an enhancing effect on both imports and exports between old and new members. Further analysis of subdivided data reveals that formal alliance between old and new members boosts bilateral trade of security‐sensitive products, facilitates specialisation and helps mitigate trade disputes, suggesting that deepening of mutual strategic trust is a possible channel of influence.