Trade and Peace Revisited

The existing literature on trade and peace has not definitively established whether bilateral trade reduces the probability of militarized conflict. While estimated effects remain highly sensitive to empirical specifications, a commonly overlooked aspect within this literature is the insufficient consideration of potential heterogeneous relationships across country pairs and the temporal dependence of conflicts. In this paper, we present supportive evidence of the pacifying effect of trade when both heterogeneity and temporal dependence are simultaneously taken into account. By applying the Arellano-Bond model to datasets from Keshk, Pollins, and Reuveny (2004) and Hegre, Oneal, and Russett (2010), which respectively indicated no and negative effects of trade on conflict, we find that bilateral trade significantly reduces the likelihood of conflict in both datasets. This finding adds further support to liberal claims regarding the interconnected nature of economic interdependence and conflict.