Does Trade Integration Contribute to Peace?

• Date: 01 February 2016
• Author: Ju Hyun Pyun,Jong‐Wha Lee
• DOI: http://doi.org/10.1111/rode.12222
• Published date: 01 February 2016

Does Trade Integration Contribute to Peace?

Jong-Wha Lee and Ju Hyun Pyun*

Abstract

We investigate the effect of trade integration on interstate military conf‌lict. Our empirical analysis, based

on a large panel data set of 243,225 country-pair observations from 1950 to 2000, conf‌irms that an

increase in bilateral trade interdependence signif‌icantly promotes peace. It also suggests that the peace-

promotion effect of bilateral trade integration is signif‌icantly higher for contiguous countries that are

likely to experience more conf‌lict. More importantly, we f‌ind that not only bilateral trade but global

trade openness also signif‌icantly promotes peace. It shows, however, that an increase in global trade

openness reduces the probability of interstate conf‌lict more for countries far apart from each other than

it does for countries sharing borders. The main f‌inding of the peace-promotion effect of bilateral and

global trade integration holds robust when controlling for the simultaneous determination of trade and

peace.

1. Introduction

The great extent and rapid increase of international trade, in being the principal

guarantee of the peace of the world, is the great permanent security for the

uninterrupted progress of the ideas, the institutions, and the character of the human

race. (Mill, 1909, p. 582)

Globalization has been one of the most salient features of the world economy

over the last century. Emerging markets and developing countries continue to

integrate into the global trading system. World merchandise trade has increased

rapidly, particularly since World War II—from 17.8% of world gross domestic

product (GDP) in 1960 to 47.4% in 2005. There has been a long tradition among

social scientists to try to understand the economic, political and social consequences

of globalization. It has always been a hotly debated topic—not merely within

academia but among the general public as well—whether globalization signif‌icantly

affects economic growth, income inequality, national identity and so on.

1

This paper focuses on the effect of trade integration on international relations,

specif‌ically military conf‌lict between individual states. Previous literature shows that

military conf‌lict can be extremely disruptive to economic activity and impede long-

term economic performance (Barro, 2006; Davis and Weinstein, 2002). In

particular, they empirically study the effect military conf‌lict has on international

trade. They f‌ind that conf‌lict between countries signif‌icantly reduces international

trade and thus seriously damages national and global economic welfare (Blomberg

*Lee: Economics Department, Korea University, Sungbuk-Ku, Anam-dong 5-1, Seoul, 136-701, South

Korea. Tel.: +82-2-33202216; Fax: +82-2-928-4948; E-mail: jongwha@korea.ac.kr. Pyun: Korea University

Business School, Korea University, Sungbuk-Ku, Anam-dong 5-1, Seoul, 136-701, South Korea. We thank

Robert Barro, Paul Bergin, Colin Cameron, Robert Feenstra, Zeev Maoz, Chris Meissner, Giovanni Peri,

Alan Taylor, anonymous referees, and seminar participants at the Asian Development Bank for very

helpful suggestions.

Review of Development Economics, 20(1), 327–344, 2016

DOI:10.1111/rode.12222

©2016 John Wiley & Sons Ltd

and Hess, 2006; Glick and Taylor, 2005). However, the opposite relationship

between international trade and the probability of interstate military conf‌lict—

whether international trade has any signif‌icant impact on conf‌lict—is still

controversial.

There is ongoing debate among scholars whether the increase of bilateral

economic interdependence reduces interstate conf‌lict. The “liberal peace” view in

political science—traced back to Montesquieu, Kant, Angell and Schumpeter—

emphasizes that mutual economic interdependence can be a conduit of peace. It

suggests that a higher degree of bilateral economic interdependence limits the

incentive to use military force in interstate relations. For instance, a more trade-

dependent state is less likely to f‌ight a partner because of the larger opportunity

cost associated with the loss of trade. Business elites—who gain most from an

increased economic interdependence—will also lobby the state to restrict the use of

military force against an important trading partner.

While the “liberal peace” view is convincing, there are numerous counter-

arguments. For instance, the dependency theorists (Wallerstein, 1974) and neo-

Marxists (Emmanuel, 1972), argue that asymmetric economic interdependence

could lead to negative consequences in a country—such as exploited concession and

threatened national autonomy—thereby creating interstate tensions and conf‌licts

(Dos Santos, 1970). Many conf‌licts in the mercantilist era evolved out of trade

disputes.

Empirical studies have also investigated whether bilateral trade interdependence

increases or reduces the likelihood of military conf‌lict between trading partners.

Similar to theoretical literature, the f‌indings of these studies are ambiguous. Earlier

studies, such as Polachek (1980) and Polacheck et al. (1999), show that there is a

negative relationship between bilateral trade volume and the frequency of interstate

military conf‌lict. However, Barbieri (1996, 2002) investigates the relationship

between various measures of bilateral trade links and military conf‌lict. She f‌inds

that a measure of bilateral trade interdependence has a signif‌icantly positive impact

on military conf‌lict. In reverse, subsequent research—including Oneal and Russett

(1999) and Gartzke and Li (2003)—show that with the use of a different measure of

bilateral trade interdependence, the interdependence appears to reduce military

conf‌lict.

In contrast to the numerous studies on the impact of bilateral trade

interdependence on military conf‌lict, there are only a few studies examining the

role of global trade integration.

2

If global trade integration increases trade

interdependence uniformly with all bilateral trade partners, the distinction between

bilateral and global trade integration is not critical. However, deeper integration

into global markets can take place unevenly, lowering trade interdependence with

some trading partners. The overall impact of trade integration on interstate conf‌lict

is likely to depend not only on the change in bilateral trade integration but also on

global trade integration.

An increase in global trade openness is expected to reduce the probability of

military conf‌lict as it leads to an increase in the extent of bilateral trade

interdependence. However, when the level of bilateral trade interdependence is

controlled, the effect of increased global trade openness on the probability of

bilateral conf‌lict is not clear. Barbieri and Peters (2003) f‌ind “trade openness” has a

negative impact on the probability of inter-state military conf‌lict. In contrast,

Martin et al. (2008) shows that “multilateral trade openness,” that is, global trade

openness, increases the probability of conf‌licts.

328 Jong-Wha Lee and Ju Hyun Pyun

©2016 John Wiley & Sons Ltd