International Trade, Cooperation, and Conflict: The Role of Institutions and Capabilities

In this paper, we reconcile divergent theories linking trade to conflict - opportunity costs and costly signaling on the one hand versus dependence and coercion on the other hand. We argue that variation in domestic political institutions and state capabilities can condition how international trade affects conflictual or cooperative political relationships. When institutions result in a more nationally representative constituency, trade has a relatively more negative association with conflict, whereas deviation from this institutional arrangement reduces the pacifying impact of trade. The presence of greater military capabilities incentivizes leaders to use trade as a lever to advance other state interests. As such, for more powerful states, trade is associated with relatively more conflict and cooperation. We find support for our expectations in statistical tests spanning 1994-2012.