Dyadic Trade, Exit Costs, and Conflict

Abstract

Most studies of the link between dyadic trade and militarized conflict examine the extent of trade interaction. However, interaction measures do not account for the impact of cutting off trade (i.e., exit costs). In this article, I highlight the link between exit costs, the cost of conflict, and “the spoils of conquest,” arguing that one state’s exit costs are associated with higher incidence of dyadic conflict when its trade partner’s exit costs are low. However, its exit costs become less aggravating—and eventually pacifying—as its trade partner’s exit costs increase. I test this argument by estimating import demand and export supply elasticities, developing yearly exit cost measures for directed dyads, 1984–2000. Statistical tests confirm that unilaterally high exit costs are aggravating, but that jointly high exit costs are pacifying, a pattern most prominent for trade in strategic commodities.