Alliance networks and trade
| Published date | 01 May 2016 |
| Author | Dotan A Haim |
| DOI | 10.1177/0022343316630938 |
| Date | 01 May 2016 |
| Subject Matter | Research Articles |
Alliance networks and trade: The effect
of indirect political alliances on bilateral
trade flows
Dotan A Haim
Department of Political Science, University of California, San Diego
Abstract
How does the network of international political alliances influence trade flows? Previous work suggests that
alliances matter in predicting trade outcomes because governments align trade policies with national security
interests and firms take political relations between states into account when assessing risk. However, work to
date investigates only the relationship between direct political alliances and trade, which ignores the complexity
of international allian ce structures. In this article, I argue that states and firms not only consider direct political
relationships when shaping international trade, but also focus crucially on indirect alliance relationships. I find that
higher levels of trade result when states have more shared alliances and when they are in the same alliance community.
Once these indirect relationships are accounted for, the apparent association of dyadic alliances with trade is
drastically reduced. Joint membership in an alliance community predicts an increase in trade that is more than twice
the increase associated with a dyadic alliance. This effect is magnified when considering highly ‘central’ states in the
alliance network. States trade significantly more with central states in their own alliance community and less with
central states in other communities.
Keywords
alliances, network analysis, trade
Introduction
While previous studies agree that political alliances have
notable impacts on trade outcomes, the existing litera-
ture limits examination to direct political relationships.
Focusing only on political relationships within dyads
overlooks the complexity and interdependence of inter-
national alliance structures and misses important aspects
of how international power politics affect trade. A grow-
ing literature on international networks has shown the
value of considering extradyadic relationships between
states when investigating a variety of international phe-
nomena (Maoz, 2012; Ward, Stovel & Sacks, 2011;
Hafner-Burton, Kahler & Montgomery, 2009). In this
article, I argue that a network approach considering indi-
rect alliances allows for important theoretical and empiri-
cal advances in understanding the relationship between
alliances and trade.
Building on the seminal work of Gowa & Mansfield
(1993), I focus on the influence of alliances on govern-
ment trade policy shaped by security externalities (the
potential for economic gains to be transferred to political
and military power) and on firm-level risk. The central
claim of this article is that these mechanisms can be
better conceptualized by considering the properties of
the larger international alliance network rather than just
dyadic relationships. When leaders in a state, A, consider
security externalities of trade policy relating to another
state, B, they take into account not only their direct
political relationship with B, but also the alliances B has
with other states. For example, during the Cold War, the
USA restricted trade with Soviet proxies in Eastern
Corresponding author:
dhaim@ucsd.edu
Journal of Peace Research
2016, Vol. 53(3) 472–490
ªThe Author(s) 2016
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DOI: 10.1177/0022343316630938
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Europe through some of the most restrictive tariffs in the
nation’s history (Gowa, 1994). The motivation behind
this had little to do with security externalities deriving
from direct relationships with these countries. On their
own, most Soviet proxies posed little threat to US secu-
rity. More salient to US policy concerns were the poten-
tial negative security externalities deriving from the
relationship these states had with the Soviet bloc. Addi-
tionally, at the subnational level, firms take indirect alli-
ance relationships into account when evaluating the risk
of setting up trade channels because of the effect alliances
have on the likelihood of conflict and opportunistic gov-
ernment behavior.
The rest of the article proceeds as follows: I begin by
laying out the mechanisms by which political alliances
affect trade, focusing on the way that alliance networks
shape government trade policy and firm-level risk. I
argue that while the direct political relationship between
a home country and a potential trading partner matters,
in most cases, government policy and investment risk are
driven primarily by the alliances trade partners have with
other states. Next, I turn from theory to empirical
hypotheses, predicting that shared alliances and alliance
communities have important influences on trade flows.
Additionally, because states that occupy central positions
in an alliance community are likely to be more important
to the security of their bloc than peripheral states, I
predict that states will differentially promote trade to
central members of their own community and restrict
trade to central members of other communities. Finally,
I present results from an empirical study of trade levels
from 1950 to 2001. These results suggest that indirect
alliances play an important role in determining interna-
tional trade. Shared alliances, alliance communities, and
states’ centrality in the alliance network are substantially
betterpredictorsoftradeflowsthandyadicalliances.
Joint membership in an alliance community predicts
an increase in trade that is more than twice the increase
associated with a dyadic alliance.
Theory: How indirect alliances influence trade
An important line of literature in international relations
finds that political alliances facilitate international trade
while political tensions result in trade restrictions (Gowa
& Mansfield, 1993; Gowa, 1994; Pollins, 1989b; Long,
2003; Gowa & Mansfield, 2004). Alliances are linked to
trade flows through two main mechanisms. First, polit-
ical alliances drive ‘security externalities’ that arise from
trade, which in turn influence government trade policy
towards other states. Second, political alliances influence
the likelihood of future opportunistic behavior by gov-
ernments towards foreign firms and the risk of conflict
between states, which firms take into account when
determining whether to invest or set up trade channels
with other states. Both of these factors can influence
overall trade levels, but previous studies focus exclusively
on the role of dyadic alliances when discussing these
mechanisms. In this section, I elaborate on each mechan-
ism and discuss how indirect alliances affect both gov-
ernment policy and firm-level risk evaluation.
Policy mechanism
The first reason political alliances affect trade outcomes
concerns the incentives facing national governments
when setting trade policy. Because economic gains can
be translated into military strength and international
influence, trading with a political enemy results in neg-
ative security externalities that reduce the benefits of
trade (Gowa & Mansfield, 1993). In contrast, trading
with an ally results in positive externalities, as the power
that an ally gains from increased trade increases the secu-
rity for both parties in the relationship. Taking into
account the differential costs and benefits of trade,
national governments set trade policy to better align with
national security interests, encouraging trade with allies
and discouraging trade with enemies.
While Gowa & Mansfield (1993) hint at the fact that
indirect alliances matter, the theoretical implications of
indirect alliance relationships are not discussed in detail
and are not considered in the empirical analysis. Fleshing
out the logic of security externalities through a network
framework provides new theoretical insights and allows
for measurement that more accurately captures real-
world security externalities. I argue that governments
explicitly think in terms of indirect alliances when mak-
ing decisions over trade policy. This manifests in two
ways: (1) states consider indirect alliances when crafting
their own bilateral trade policy with other states, and (2)
states actively promote trade between their allies.
First, historical evidence suggests that states expli-
citly consider indirect political alliances when crafting
bilateral trade policy with other states. During the Cold
War, the USA actively promoted trade with countries
aligned with the Western bloc while implementing the
highest tariffs in the nation’s history on imports from
theSovietbloc(Gowa,1994).Thepoliticalmotivation
behind these policies was likely not primarily based on
direct alliance ties. For example, the USA did not
impose an embargo on Cuba primarily because of con-
cerns stemming from the dyadic relationship. No
Haim 473
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