Globalization and wartime trade

Abstract

This article argues that on balance globalization does not increase, and may even reduce, the opportunity cost of Militarized Interstate Disputes (MIDs), as measured by foregone merchandise trade. Specifically, globalization makes it easier for states to substitute trade partners, makes it difficult to employ trade sanctions, makes credit more available to states at conflict, and encourages trade-substituting horizontal Foreign Direct Investment (FDI) and sanctions-resilient vertical FDI. Hypotheses are supported using High Dimensional Fixed Effects regression, applied to a Gravity model, with two-way clustering of standard errors, and an analysis of the effect of globalization on the marginal effect of MIDs on international trade. This suggests that while wars are becoming infrequent in recent decades, due to other factors, trade’s contribution to peace is diminishing.