Liberalism and interdependence

Abstract

The question of whether trade affects conflict is important for public policy. To date, theoretical studies have treated trade or the gains from trade as exogenous. However, a dyad's gains from trade are influenced by a number of factors, including foreign aid, tariffs, contiguity, and relative country size. This article presents a mathematical model to extend the conflict - trade model to incorporate foreign aid, tariffs, contiguity, and country size. In particular, we examine how the gains from trade are affected by these factors, with foreign aid, and contiguity increasing the gains from trade and tariffs reducing the gains from trade. Small countries have larger trade gains when trading with a large country than with a small country. If countries seek to protect their trade gains, the model predicts that foreign aid and contiguity will decrease conflict, while tariffs will increase conflict. The contiguity result suggests that conflict between neighboring countries would be greater than observed if not for the mitigating effects of trade. Trade with large countries decreases conflict more than trade with small countries. In addition, rather than concentrating solely on bilateral interactions, the models are specified in enough detail to garner implications concerning the effects of changes in the terms of trade on third parties. Empirical results, generally supporting the hypotheses, are presented using a sample from the Conflict and Peace Data Bank.