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Beyond Ricardo: The Link between Intra-Industry Trade and Peace

  • Timothy M. Peterson and Cameron G. Thies
Abstract

In this article, it is argued that horizontal intra-industry trade is associated with reduced conflict propensity within dyads. Horizontal intra-industry trade is characterized by participation in international markets for similar – in many cases, branded – commodities, resulting from economies of scale and consumer tastes for variety. Conversely, inter-industry trade in accordance with the Ricardian and Heckscher–Ohlin models, while providing valuable trade gains, in some instances provokes vulnerability to trade partners, such that its overall impact on dyadic conflict is ambiguous. Support for this expectation is found in empirical tests spanning from 1963 to 2001. Additionally, there is evidence that development is insufficient to preclude conflict when jointly developed dyads engage in no intra-industry trade.

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Department of Political Science, Oklahoma State University (email: timothy.peterson@okstate.edu); and Department of Political Science, University of Iowa, respectively. The authors wish to thank the Editor and three anonymous reviewers for very helpful comments. An Appendix is available at http://dx.doi.org/10.1017/S0007123412000129. Replication data and a supplemental appendix are available at https://sites.google.com/site/timothympetersonosu/.

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2 Bruce Russett and John Oneal, Triangulating Peace: Democracy, Interdependence and International Organizations (New York: W. W. Norton, 2001), pp. 174177

3 Findlay and O'Rourke, Power and Plenty, p. 426.

4 As Findlay and O'Rourke explain, industrializing states in Europe and North America leveraged growing economic asymmetries to expand their political influence and military power, subjugating large portions of Asia and Africa. As such, growing volumes of global trade served to facilitate and complement, rather than reduce, conflict. Findlay and O'Rourke, Power and Plenty, p. 388.

5 We refer specifically to horizontal intra-industry trade.

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21 Dorussen, ‘Heterogeneous Trade Interests and Conflict’.

22 Dorussen, ‘Heterogeneous Trade Interests and Conflict’.

23 David Ricardo, The Principles of Political Economy and Taxation (Cambridge: Cambridge University Press, [1817] 1981)

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24 Polachek, Solomon, ‘Conflict and Trade’, Journal of Conflict Resolution, 24 (1980), 5578

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25 Hirschman, Albert O., National Power and the Structure of Foreign Trade (Berkeley: University of California Press, 1945)

26 We refer specifically to horizontal intra-industry trade – for example, trade of cars for cars or steel for steel. We distinguish this form of trade from vertical intra-industry trade (e.g., trade of engine components for finished cars) and intra-firm trade, which are more similar to specialization-based inter-industry trade. We explore these distinctions further in the research design.

27 Krugman, ‘Increasing Returns, Monopolistic Competition, and International Trade’; Krugman, ‘Intraindustry Specialization and the Gains from Trade’.

28 Rauch, James E., ‘Networks Versus Markets in International Trade’, Journal of International Economics, 48 (1999), 735

29 Keohane and Nye, Power and Interdependence.

30 Crescenzi, Mark, ‘Economic Exit, Interdependence, and Conflict’, Journal of Politics, 65 (2003), 809832

31 Galtung, John, ‘A Structural Theory of Imperialism’, Journal of Peace Research, 8 (1971), 81117

32 This process is costly, which may deter conflict, ceteris paribus. Again, however, because these exit costs may not be equal (i.e. if one state can redirect lost dyadic trade more easily), asymmetric exit costs may be a point of contention within the dyad (see Peterson, ‘Dyadic Trade, Exit Cost, and Conflict’), leading to an overall unclear impact of inter-industry trade on conflict. Although it is possible for inter-industry trade to result in comparable levels of dependence for each trade partner, a condition that could be associated with higher prospects for peace, inter-industry trade often involves the trade (in one direction) of strategically vital commodities, potentially leading to asymmetry in dependence – and the vulnerability inherent therein – that introduces considerable error into the overall influence of trade.

33 Dorussen, Han and Ward, Hugh, ‘Trade Networks and the Kantian Peace’, Journal of Peace Research 47 (2010), 29–42

34 This would also be true in instances where non-branded, undifferentiated commodities are exchanged in a dyad, such as trade in similar grains or types of steel between the United States and European Union member states.

35 Again, non-branded intra-industry trade (e.g., bilateral trade of steel, which occurs between the United States and several European Union states) does not bestow this additional pacifying influence; however, the mere lack of vulnerability associated with non-branded intra-industry trade suggests that the opportunity cost effect results in a pacifying influence (see Polachek, ‘Conflict and Trade’) because the absence of strategic vulnerability suggests an absence of tension. However, because the added benefit of consumer demand for variety – and mutual brand recognition – is absent, non-branded intra-industry trade should be somewhat less pacifying than the branded variant.

36 McDonald, Patrick J., ‘Peace through Trade or Free Trade?’ Journal of Conflict Resolution, 48 (2004), 547572

37 Balassa, Bela, Trade Liberalization among Industrial Countries (New York: McGraw-Hill, 1967)

Aquino, Antonio, ‘Intra-Industry Trade and Inter-Industry Specialization as Concurrent Sources of International Trade in Manufactures’, Review of World Economics, 114 (1978), 275296

Kono, Daniel, ‘Market Structure, Electoral Institutions, and Trade Policy’, International Studies Quarterly, 53 (2009), 885906

38 Levy, Phillip I., ‘A Political-Economic Analysis of Free-Trade Agreements’, American Economic Review, 87 (1997), 506519

39 Although some intra-industry trade in automobiles occurs between the United States and Japan, these trade flows historically have been comprised primary of Japanese exports to the United States. More efficient Japanese vehicles (along with cultural preference) result in relatively low imports of American vehicles.

40 The American automotive industry serves as an example in which protectionism was beneficial for intra-industry trade. In the 1980s, superior Japanese vehicles threatened to drive American automakers out of business. Japan agreed to voluntary export restraints (VERs), which limited quantity and raised prices of Japanese vehicles relative to American substitutes, increasing domestic sales of American cars, and arguably saving American automotive firms. The General Agreement on Tariffs and Trade (GATT) and World Trade Organization (WTO) rules increasingly proscribe non-tariff trade barriers, which we contend could have a detrimental effect on peace. Currently, the United States–Japan trade relationship appears strong and American automotive firms survive. If American car companies do collapse, however, forcing the United States to import all of its cars, then intra-industry trade will decrease and inter-industry trade will increase, relatively speaking, rendering the United States more vulnerable to its trade partners – notably Japan, from which it imports a large proportion of its automobiles. Of course, free trade is always the most efficient economically; however, economic inefficiencies associated with protectionism could decrease political tension in some circumstances, perhaps most notably when moderate protectionism fosters intra-industry trade.

41 Bergstrand, Jeffrey H., ‘The Heckscher–Ohlin-Samuelson Model, the Linder Hypothesis and the Determinants of Bilateral Intra-Industry Trade’, Economic Journal, 100 (1990), 12161229

42 Rosecrance, The Rise of the Trading State; Hegre, ‘Development and Democracy’.

43 Keohane and Nye, Power and Interdependence.

44 This argument suggests the question: when is specialization aggravating or pacifying? Perhaps specialization is pacifying when states do not face incentives to use a trade partner's dependence as leverage in coercion attempts. Although this question is beyond the scope of this article, it presents a potentially very lucrative avenue for future research.

45 Rosecrance, The Rise of the Trading State; Liberman, ‘The Spoils of Conquest’.

46 Ultimately, we think that the occasionally coercive aspects of vulnerability introduce variation into an otherwise pacifying impact of trade gains. As mentioned above, future research can benefit from examining conditions in which specialization leads to coercion.

47 Given that these hypotheses suggest the lack of a relationship between two variables, we construe non-significance in statistical tests of these variables as support for the hypotheses. However, this support should be interpreted modestly, given that it is much easier not to find statistical evidence of a relationship than it is to find statistically significant support for a relationship.

48 Keshk, Omar, Reuveny, Rafael and Pollins, Brian, ‘Trade and Conflict: Proximity, Country Size, and Measures’, Conflict Management and Peace Science, 27 (2010), 327

Keshk, Omar, Pollins, Brian and Reuveny, Rafael, ‘Trade Still Follows the Flag: The Primacy of Politics in a Simultaneous Model of Interdependence and Armed Conflict’, Journal of Politics, 66 (2004), 11551179

Hegre, Havard, Oneal, John R. and Russett, Bruce, ‘Trade Does Promote Peace: New Simultaneous Estimates of the Reciprocal Effects of Trade and Conflict’, Journal of Peace Research, 47(2010), 763–774

49 Carter, David B. and Signorino, Curtis S., ‘Back to the Future: Modeling Time Dependence in Binary Data’, Political Analysis, 18 (2010), 271292

50 Although data on the extent of battle deaths are not always reliable, we are confident that they accurately capture whether there are any battle deaths. However, there are 46 observations in our dataset in which fatalities are missing. These MIDs are coded as non-fatal in our primary models. In robustness check models available from the authors, we examine these disputes in detail, coding fatal dispute as equal to 1 if there are recorded battle deaths at subsequent years in MIDs that last longer than one year. All results are robust in these robustness checks.

51 Ghosn, Faten, Palmer, Glenn and Bremer, Stuart, ‘The MID3 Data Set, 1993–2001: Procedures, Coding Rules, and Description’, Conflict Management and Peace Science, 21 (2004), 133154

52 King, Gary and Zeng, Langche, ‘Explaining Rare Events in International Relations’, International Organization, 55 (2001), 693715

53 Hegre, ‘Development and Democracy’; Hegre, Oneal and Russett, ‘Trade Does Promote Peace’. In robustness checks available from the authors, we use a Heckman selection model to examine MID onset and escalation (i.e., hostility level) simultaneously, finding that intra-industry trade is associated with a lower probability of any type of militarized dispute, but that it does not affect dispute escalation.

54 Robert Feenstra, Robert E. Lipseym, Haiyan Deng, Alyson C. Ma and Hengyong Mo, ‘World Trade Flows: 1962–2000’, NBER Working Paper 11040 (2005), http://www.nber.org/papers/w11040.

55 D. Greenaway and P. K. M. Tharakan, eds, Imperfect Competition and International Trade (Brighton, Sussex: Wheatsheaf, 1986), pp. 201–262

Grubel, H. G. and Lloyd, P. J., ‘The Empirical Measurement of Intra-Industry Trade. Economic Record’, Economic Record, 44 (1971), 494517

56 Because total imports and exports are at the country-year level, we avoid problems of division by zero, as there are almost no examples of years in which countries do not import or export at all. All results are robust when we recreate the intra-industry trade index adding 1 to the numerator and denominator of trade-balanced values.

57 Importantly, this measure captures the proportion of dyadic trade that is intra-industry, not the flow of intra-industry trade or the proportion of either state's economy that depends on intra-industry trade. We address this issue below.

58 This trade-balance weighting is suggested by Aquino, ‘Intra-Industry Trade and Inter-Industry Specialization as Concurrent Sources of International Trade in Manufactures’, in order to avoid under-representing intra-industry trade. For example, if a country has a severe trade deficit (importing more than it exports), then even if all of its imports and exports were within a single industry (and hence the index should equal 1), the simple index would report a smaller proportion of intra-industry trade because exports minus imports cannot equal zero.

59 Grimwade, Nigel, International Trade: New Patterns of Trade, Production, and Investment (London: Routledge, 1989)

60 Kono, ‘Market Structure, Electoral Institutions, and Trade Policy’.

61 The COMTRADE database has strict download limits unless one purchases a subscription.

62 Feenstra, Lipseym, Deng, Ma and Mo, ‘World Trade Flows: 1962–2000’.

63 Kono, ‘Market Structure, Electoral Institutions, and Trade Policy’.

64 Also, somewhat less aggregated data, for example at the SITC-3 digit level, would nonetheless incorporate a considerably amount of vertical intra-industry trade, whereas we attempt to isolate the horizontal variant.

65 As such, its SITC 5-digit code is simply 78120.

66 Practically, intra-firm trade often is vertical intra-industry trade, although this is not a necessary occurrence.

67 Ruffin, R., ‘The Nature and Significance of Intra-Industry Trade’, Federal Reserve Bank of Dallas Economic and Financial Review, 1:4 (1999), 2–9

68 Krugman, Paul, ‘Growing World Trade: Causes and Consequences’, Brookings Papers on Economic Activity, 1 (1995), 327377

69 Blanes, José V. and Martín, Carmela, ‘The Nature and Causes of Intra-Industry Trade: Back to the Comparative Advantage Explanation? The Case of Spain’, Review of World Economics, 136 (2000), 423441

70 Gledtisch, Kristian, ‘Expanded Trade and GDP Data’, Journal of Conflict Resolution, 46 (2002), 712724

71 Barbieri, Katherine, ‘Economic Interdependence: A Path to Peace or a Source of Conflict?’ Journal of Peace Research, 33 (1996), 2949

72 E.g., John R. Oneal, Frances H. Oneal, Zeev Maoz and Bruce Russett, ‘The Liberal Peace: Interdependence, Democracy, and International Conflict, 1950–85’, Journal of Peace Research, 33 (1996), 1128

73 Hegre, ‘Development or Democracy’; Hegre, Oneal and Russett, ‘Trade Does Promote Peace’.

74 Monty G. Marshall and Keith Jaggers, ‘Polity IV Project: Political Regime Characteristics and Transitions, 1800–2008’ (available at: http://www.systemicpeace.org/polity/polity4.htm). The use of 5 as a cut-off point follows from the recommendation by Marshall and Jaggers. However, results are consistent using 6 or 7 as the cut-off point. Also, in the on-line appendix, we present models using lower polity score and higher polity score, to facilitate a more direct comparison with Hegre, Oneal and Russett, ‘Trade Does Promote Peace’.

75 Hegre, Oneal and Russett, ‘Trade Does Promote Peace’.

76 Leeds, Brett Ashley, Ritter, Jeffrey M., Mitchell, Sara McLaughlin and Long, Andrew G., ‘Alliance Treaty Obligations and Provisions 1815–1944’, International Interactions, 28 (2002), 237260

77 Bennett, Scott. and Stam, Alan, ‘EUGene: A Conceptual Manual’, Interaction Interactions, 26 (2000), 179204

78 However, correlations are low to moderate, with the highest between intra-industry trade and lower dependence (0.45). As such, we have confidence that our results are not a statistical artefact of multicollinearity.

79 Specifically, the probability decreases from 0.0003 to 0.0002. All reported probability changes are significant at the 0.05 level. Percentage changes in probability are calculated as: (new probability − old probability)/old probability × 100. All substantive probabilities are very small, due to the fact that the median case involves dyad members over 4,000 miles apart, and with 16 years of peace. The baseline probability of fatal MID onset with all variables held at their medians is 0.0003.

80 Braumoeller, Bear, ‘Hypothesis Testing and Multiplicative Interaction Terms’, International Organization, 58 (2004), 807820

Brambor, Thomas, Clark, William Roberts and Golder, Matt, ‘Understanding Interaction Models: Improving Empirical Analysis’, Political Analysis, 14 (2006), 6382

Kam, Cindy D. and Franzese, Robert J., Modeling and Interpreting Interactive Hypotheses in Regression Analysis (Ann Arbor: The University of Michigan Press, 2007)

81 Hegre, ‘Development and Democracy’.

82 We calculate marginal effects of interactions using the margins command in Stata.

83 A detailed examination of interaction effects supports this conclusion. Figures of these marginal effects are available by request from the authors.

84 The inclusion of the interaction between the lower development and lower dependence in Model 6 complicates the interpretation somewhat, given that when trade dependence equals zero, intra-industry trade must also equal zero. Results are also robust when including a three-way interaction between development, trade and intra-industry trade; however, we do not present these models due to the difficulty in interpretation. These models are available by request from the authors.

* Department of Political Science, Oklahoma State University (email: ); and Department of Political Science, University of Iowa, respectively. The authors wish to thank the Editor and three anonymous reviewers for very helpful comments. An Appendix is available at http://dx.doi.org/10.1017/S0007123412000129. Replication data and a supplemental appendix are available at https://sites.google.com/site/timothympetersonosu/.

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