Does Trade Integration Contribute to Peace?

Abstract

This paper investigates the effect of trade integration on military conflict. Our empirical analysis, based on a large panel data set of 290,040 country-pair observations from 1950 to 2000, confirms that an increase in bilateral trade interdependence and global trade openness significantly promotes peace. It also suggests that the effect of trade openness varies depending on the geographical proximity of countries. The peace-promotion effect of bilateral trade integration is significantly higher for contiguous countries that are likely to experience more conflicts. The analysis shows, however, that an increase in global trade openness reduces the probability of conflict more for countries far apart from each other than it does for countries sharing borders. The results also show that military conflict between countries significantly reduces not only bilateral trade interdependence but also multilateral trade integration. The main finding of the peace-promotion effect of bilateral and global trade integration holds robust when controlling for the natural and geopolitical characteristics of dyads of states that may influence the probability of military conflict and for the simultaneous determination of trade and peace.