David R. Henderson  

Trade Creates Peace

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"Germany Vexed by Ties to Russia."

So reads the headline of a front-page article in the Saturday/Sunday Wall Street Journal by Anton Troianovski. Mr. Troianovski goes on to point out the tension between German Chancellor Angela Merkel's desire to be pro-U.S. government in its stand against Russia and her desire to not mess up trade relations with Russia. [The headline above is the print headline. The electronic article's headline is "Germany's Trade Ties to Russia Bind."]

Troianovski writes:

U.S. politicians have voiced frustrations in recent weeks about Germany's reluctance to take a more confrontational stand against Russia. But for Germans, the risk in pursuing a hard line is unmistakable. Places like Mecklenburg-Western Pomerania--a region of 1.6 million with the country's lowest average income--have much to lose.

For years, economists have noted that all other things equal, the more trade there is between countries, the more peaceful they are with each other. I pointed this out in an article in 2010. I wrote:
But there is another gain from trade that is especially relevant in a discussion of foreign policy: More trade leads to more peace between the countries that trade. The reason is that war reduces trade and, therefore, those in both countries that would otherwise gain from trade lose because of the trade that doesn't take place. Many scholars who study war and trade have been aware of this connection. In 1750, Baron de Montesquieu stated that "peace is the natural effect of trade." This was confirmed in a 2006 study, "An Analysis of Dyadic Dispute," by Solomon W. Polachek of the State University of New York at Binghamton and IZA Bonn and Carlos Seiglie of Rutgers University. Polachek and Seiglie show that the higher the gains from trade between two trading partners, the lower is the level of conflict between them. A doubling of trade leads to a 20-percent decrease in belligerence. In short, trading nations cooperate more and fight less.

Let's hope.

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CATEGORIES: International Trade

COMMENTS (8 to date)
Pajser writes:

It is an argument for some kinds of subsidization, isn't it?

Brandon writes:

I hate to be the jerk in the room (especially a room full of libertarians!), but there is not a lot of evidence to support the Pax Mercatoria. Edwin van de Haar, a political scientist in the Netherlands, recently blogged about this very issue within libertarianism (and here is a short pdf by another political scientist, PR Goldstone, outlining the discipline of IR's findings on Pax Mercatoria).

Basically trade may lead to peace, but there is just as much chance that it may also lead to conflict. This either/or path has a lot to do with a state's domestic institutions and geopolitical considerations.

Michael Williams writes:

@ Brandon would you say free trade leads to peace?
I offer up a small example of my time in Baqubah Iraq where the violence in my area dramatically fell when we, along with the Iraqi security forces, were able to provide enough security and establish basic rule of law that commerce/trade began and then increased between the rural Shia and urban based Sunni populations (Free Trade). Once they saw the economic possibilities, and the betterment of their lives because of those opportunities the level of violence plummeted (and information provided to us against those committing/planning violence increased). Unfortunately the violence rose when the local government and police forces (Shia mainly) began to establish rules and barriers (they tried to ban where people could and could not sell produce, who could sell electronics, etc.) mainly focused against the majority Sunni population (matter of fact they cited that the Shia were minorities and thus needed these protections). We worked hard to eliminate these barriers but were unsuccessful as my unit rotated out (and I do not know the success of the follow on unit). So I would argue that the may clause in your trade and peace equation exists due to the lack of free trade.

Christopher Chang writes:

Unfortunately, 1914 makes it clear that international relations affect trade more than the other way around.

Ed Hanson writes:

Are you saying that Russia was not an important trade partner of Ukraine? Admittedly I have not looked for statistics (do you have them?) but I suspect that geological and historical ties meant that extensive trade occurred. Didn't seem to help.


Jim Glass writes:

"Trade Creates Peace" famously was the very well known and very popular thesis of Norman Angell: that international trade -- then by many measures at a higher level than at any time until quite recently (and by a few measures higher even than today) -- made war impractical, or at least unsustainable should it occur, circa 1914.

Pretty much everyone believed it, even the Kaiser, which is why they all assumed the next war would be brief -- which ironically made them all more willing to fight it (the Kaiser was counting on 39 days). Well, we know what subsequent events said about that.

My own opinion is that the decline in war among nations that have increased trade with each other is primarily do to the fact that such high-trade nations have increasingly become democracies, and democracies fight few wars with each other. The participants in WWI were high-trade but not democracies. (Not that democracies don't fight wars, but leaders of democracies are loath to start wars they aren't very sure they will win, and opposite sides rarely both believe that at the same time).

One opinion, FWIW. Though we can also hope that Angell was simply ahead of his time, that the trade process works but just takes a lot longer to erase volatile cultural differences than he believed. I think there's something to that too.

Chris Koresko writes:

@David: It's amazing how differently we interpret these events.

I look at it and see Russia wielding economic threats (especially to cut of the supply of natural gas) to prevent the West from mounting a coordinated response to their aggression in Ukraine. That response would almost certainly take the form of economic sanctions and political pressure, not warfare, and the absence or weakness of it tends to clear the field for further Russian military aggression.

This scenario does not suggest "trade leads to peace" to me, but rather something closer to the opposite.

David Friedman writes:

Rudyard Kipling even wrote a poem on the subject: "The Peace of Dives."

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