Sleeping with the Enemy: The Impact of War on Trade

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Abstract
Current debates over the question of whether economic interdependence promotes peace or contributes to international conflict are often framed in terms of the `paradigm wars' between liberal and realist theory. In spite of their differences, most liberal and realist theories of interdependence and conflict agree that trade and other forms of economic interchange between societies will cease or be substantially reduced once states are engaged in serious forms of conflict with each other, particularly after the outbreak of war. Liberal theories generally assume that political leaders are deterred from engaging in conflict when they anticipate that conflict will disrupt or eliminate trade or adversely affect the terms of trade, so the hypothesis that trade deters war rests on the assumption that war impedes trade. Realist theories suggest that the concern over relative gains will lead at least one of the belligerents to terminate trade in order to prevent its adversary from using the gains from trade to increase its relative military power. Contrary to these predictions, there are numerous historical examples of trade between adversaries that continues during wartime. Our aim here is to examine this phenomenon more systematically by conducting an empirical analysis of the short-term and long-term impact of war on trade for seven dyads in the period since 1870. Applying an interrupted time-series model, we find that in most cases war does not have a significant impact on trading relationships. Although war sometimes leads to a temporary decline in the level of dyadic trade, in most instances war has no permanent long-term effect on trading relationships and, in fact, trade often increases in the postwar period. This empirical anomaly in both liberal and realist theories of interdependence and conflict leads us to conclude that both theories need to be reformulated.