Two neighboring countries which have been at war with each other decide to make peace. Their governments undertake to allow their citizens to engage in trade and other economic transactions. This article considers the impact of different bilateral transactions on the welfare of producers and consumers in the two countries and hence on their attitude toward peace. Distinction is made between the effects of different kinds of transactions, including those involving existing and new trade as well as existing and new productions. Special reference is made to the recent Egyptian-Israeli peace effort.