Butterfly effects in global trade: International borders, disputes, and trade disruption and diversion

Abstract

This article theorizes and tests how different types of interstate conflict across borders affect trade between disputing parties and trade diversion with third parties. Building on theories of borders as institutions, we differentiate the effects of two types of international disputes – border disputes and escalated militarized disputes – and draw on 60 years of trade and conflict data to test the effects of these disputes on bilateral and third-party trade flows. We find that border disputes and militarized disputes each depress trade flows between the disputing countries. However, legal border disputes are associated with increased trade diversion with non-disputing countries, which may fully offset the forgone bilateral trade, whereas militarized disputes have the opposite effect. These results show that actors engaged in trade can offset bilateral trade losses from a border dispute by expanding trade with third parties not involved in the dispute, but the same cannot be said of offsetting the losses from militarized disputes. The fact that border disputes and militarized disputes have opposite effects on trade diversion highlights the importance of examining both the type of dispute and the type of trade flows that are affected when studying conflict and trade and evaluating the potentially pacifying incentives of international trade.