Bilateral Trade and Conflict: A Rational Expectations Model and Empirical Tests

• Other Authors: Long, Andrew Gaylord (authoraut)
• Format: Others
• Language: English; English
• Published: Florida State University
• Subjects: Political science
• Online Access: http://purl.flvc.org/fsu/fd/FSU_migr_etd-1087

This study examines how conflict influences international trade both directly when violence occurs and indirectly through the expectations of conflict developed by economic actors. Within a gravity model of bilateral trade, I explain how armed violence increases the costs of production and the costs of exchange, thus conflict reduces the supply of foreign goods and services by firms. Assuming that firms maximize profits over both current and future periods and develop rational forecasts of future conflict, I argue that rational expectations of interstate and domestic armed conflict should also result in lower levels of bilateral trade. Trading firms' expectations regarding future conflicts increase transportation and transaction costs to firms that supply goods to foreign markets. This suggests that current trade levels depend upon expectations of future conflicts both between and within states. Using bilateral trade data for each pair of countries, I conduct a variety of empirical tests comparing the effects of conflict and expectations of conflict on bilateral trade over time and across pairs of countries. The results suggest that variation in actual conflict and the probability of conflict within a state and between a pair of states both have a significant negative influence on trade levels. After establishing that the anticipation of interstate or domestic conflict leads to reduced levels of interstate trade, I analyze different types of foreign policy behavior by states that inform firms about a higher/lower possibility of future conflicts, and thus decrease/increase trade behavior. Specifically, I argue that military alliances will affect expectations of conflict differently depending on the obligations of the treaty and the political institutions that make such guarantees. These arguments lead to hypotheses concerning the relationship between different types of alliance commitments, regime types, and bilateral trade. Statistical findings support the claim that bilateral trade levels vary according to the specific obligations of the members in a military alliance. I also examine whether factors acknowledged to contribute to recurrent conflict and factors related to the permanent settlement of a severe conflict result in different trade levels among recent interstate war opponents. The empirical evidence supports the argument that postwar bilateral trade correlates negatively with disputes over territory and among rival states and positively with a regime change imposed on the losing side of a war. This thesis provides an improved theoretical and empirical exposition of the influence of conflict and political relations more generally on international economic exchange by incorporating rational expectations of conflict into a gravity equation framework and conducting empirical tests to determine the influence of these expectations on bilateral trade. === A Dissertation Submitted to the Department of Political Science in Partial Fulfillment of the Requirements for the Degree of Doctor of Philosophy. === Spring Semester, 2004. === March 15, 2004. === Political Risk, Firms, Gravity Model, Signals, Rivalry === Includes bibliographical references. === Will H. Moore, Professor Directing Dissertation; Patrick M. O’Sullivan, Outside Committee Member; Brett Ashley Leeds, Committee Member; Sara McLaughlin Mitchell, Committee Member; Dale L. Smith, Committee Member; Mark A. Souva, Committee Member.