Disaggregated Bilateral Trade and Conflict: Exploring Propositions in a Simultaneous Framework
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Disaggregated Bilateral Trade and Conflict: Exploring Propositions in a Simultaneous Framework1 RAFAEL REUVENY Indiana University, Bloomington, IN, USA
Abstract. Several authors argue that the relationship between bilateral trade and conflict varies across goods, but most studies use total trade data. It is also argued that trade and conflict affect each other, but most studies ignore this simultaneity. This article develops a simultaneous equations model of the relationship between disaggregated bilateral trade and the level of conflict. The test requires data on disaggregated bilateral trade prices and quantities, which are available for only a few countries and goods. Consequently, the test includes the dyads formed between the US, (West) Germany, and Japan, from 1963 to 1992. The analysis identifies goods for which trade is more sensitive to conflict (or cooperation), and goods for which trade is a more potent source of conflict (or cooperation). Given the limited sample used, the article should be viewed as an exploration into potentially important issues the literature may start to address, rather than as a definitive final outcome.
Introduction The relationship between bilateral trade and conflict is controversial. Some argue that trade reduces conflict because it benefits nations. Others argue that trade causes conflict because it generates friction over the division of trade gains and competition over limited resources and markets. Yet another group argues it is trade that is affected by conflict and not the other way around. Current empirical studies typically use total trade data. However, several authors argue that the relationship between trade and conflict may vary across goods.2 More explicitly, Polachek warns that the use of total trade may bias results on the effect of trade on conflict, and Morrow et al. point out the need to verify results from lower levels of trade analysis.3 This article studies the relationship between disaggregated bilateral trade and conflict. I develop a model with three basic features. First, trade and conflict simultaneously affect each other. The need to include simultaneity is noted by several studies.4 This issue is important. For instance, a finding that trade reduces conflict may reflect that conflict inhibits trade. Moreover, if trade and conflict affect each other, unidirectional models run the risk of simultaneity bias. Second, the two countries in the model interact politically, where the conflict behavior sent from nation A toward nation B depends on reciprocity (the conflict sent from B toward A) and inertia (A’s previous behavior). While current trade and conflict models ignore these forces, there is a considerable literature demonstrating their empirical importance, which informed Ward’s golden rule that guides nations: “Do unto
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others what they have recently done unto you.”5 Third, while virtually all trade and conflict models use a unitary state actor, conceptualized as either a government or a trader, this study disaggregates
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