Simultaneity between Trade and Conflict: Endogenous Instruments of Mass Destruction

Abstract

According to the classical liberal belief, trade, which economically benefits countries, creates ties binding the interests of countries and reduces conflict. While the vast majority of the empirical literature supports this view, recent research questions these findings by also considering the reciprocal relationship between trade and conflict. If conflict also influences trade, then trade is an endogenous right-hand side regressor and previous estimates which ignore this are inconsistent. This article determines when one uses appropriate instruments for the endogenous regressors that trade reduces conflict and conflict reduces trade. Failure to use such instruments results in inconsistent estimates and can lead to the spurious conclusion that trade increases conflict. The lesson is the use of inappropriate instruments can be worse than not using them at all.