Make concentrated trade not war?

Abstract

AbstractIn a seminal paper, Martin, Mayer, and Thoenig, The Review of Economic Studies, 2008, 75(3), 865–900, show that bilateral trade decreases the probability of a militarized interstate dispute (MID), while multilateral trade increases it by allowing countries to decrease the opportunity cost of conflict through trade diversification. Lee and Pyun (2016) challenge this assertion by showing that both bilateral and multilateral trade flows reduce the likelihood of MID. This study develops an alternative measure of trade diversification based on Hirschman's (National power and the structure of foreign trade, 1945, Berkley: University of California Press) market concentration index and estimates its effect on the probability of MID. We find that the estimated impact of trade diversification on MID depends crucially on the model's inclusion of the trade–distance interaction terms.