Microchips and sneakers: Bilateral trade, shifting power, and interstate conflict

Abstract

Strong commercial ties promote peace as states shun the opportunity costs of economic disruption. However, trade also enriches and empowers states, rendering them more capable of enforcing long-term settlements. Given economic disruption does not last forever, countries can be incentivized to trade short-term economic losses for long-term political or territorial gains. This trade-off can restrict or even reverse the pacifying effect of commerce as it renders states incapable of committing to existing peaceful deals. I argue the scope condition hinges on the existing power imbalance and the security externalities of trade, defined as states’ abilities to translate trade gains into (potential) military power. For countries where the existing power gap is not extreme, the impact of bilateral strategic trade is contingent upon a country’s trade externality relative to its opponent’s. Although increased bilateral trade can be peace-promoting when the relative externality is small, the pacifying effects can dissipate as a relatively weaker state becomes more capable of exploiting trade gains. Building on recent work in network analysis, I propose a new measurement of trade externalities to test the above theory and find supporting results.