Gunboat Diplomacy: Political Bias, Trade Policy, and War
Princeton University
Abstract:
Countries with deep trading relationships rarely fight wars with one another. Here, I develop a theory of trade, war, and political bias, in which both trade and war are endogenous objects. Governments can rectify poor market access conditions abroad through war and subsequent regime change, in which the victorious country installs a liberal "puppet" government abroad. Trade policy bargaining is therefore conducted "in the shadow of power," with counterfactual wars shaping the policy choices that prevail in times of peace. When peace prevails, militarily weak countries are more open to trade than powerful ones, all else equal. Equilibrium trade policies balance domestic interests against military threats from abroad. War is less likely between liberal governments because they prefer less protectionist trade policies. As a result, trade flows and the probability of peace are positively correlated in equilibrium, even though trade does not cause peace
