Trade, conflict and alliances

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Abstract
This study examines the relationship between alliance conflict and international trade. Two schools of thought exist on this issue: some prominent writers suggest that alliance conflict reduces trade between two countries (the externality cost argument), while others suggest that it increases trade between certain countries at the cost of others (the alignment incentive argument). The study empirically tests the two propositions by analyzing the data on trade and conflict during the post‐WWII period. It is found that the relationship between trade and alliance conflict is statistically significant. The externality cost phenomenon occurs to allies, whereas the alignment incentive argument is true of neutrals. In addition, the findings of this study support the fundamental assumptions and major results in the studies of trade and conflict at the dyadic level.

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