The Trade and Conflict Debate: A Survey of Theory, Evidence and Future Research

No one disputes that international trade is affected by economic variables. However, the effects of political variables on trade also are important. For countries in peace, political agendas can affect trade through protectionism, for example. Political interventions in trade between hostile nations can halt trade, although hostile countries sometimes continue to trade. Casual observations also bear out that trade itself is a potential source of political conflict or cooperation between nations. In spite of this, economists in large part have not studied the relationship between trade and political conflict or cooperation between nations. Krugman, for one, argues that "trade politics is primarily about conflicts of interest within rather than between nations (1995: 28)." Bergeijk (1994: Chapter 5) even suggests that many economists view political conflicts between nations as unworthy of formal analysis.This does not mean that economists have ignored altogether the interaction between international economic and political variables. Various facets of this interaction have been studied by prominent economists (e.g., Smith, 1776; Mill, 1848, Keynes, 1919; Schumpeter, 1950; Tinbergen, 1962; Kindleberger, 1970). In addition, there are recent economic studies on topics such as arms races, the economic effects of arms reduction, and the link between defense expenditures and economic growth, which fall under the general rubric of peace economics.1 There is also a growing literature that views conflict as a rational economic activity. This literature uses a framework originally developed by Hirshleifer (1988) and extended by Hirshleifer (1995) and others (e.g., Grossman and Kim, 1995; Skaperdas and Syropoulos, 1996; Anderton et al., 1999). These studies, however, are theoretical and do not study the relationship between trade and political conflict using empirical data, which is the focus of this essay.