Whose trade follows the flag? Institutional constraints and economic responses to bilateral relations
| DOI | 10.1177/0022343321992825 |
| Date | 01 November 2021 |
| Author | Qin Chen,Yi Zhou |
| Published date | 01 November 2021 |
| Subject Matter | Regular Articles |
Whose trade follows the flag? Institutional
constraints and economic responses to
bilateral relations
Qin Chen
Research Department, BBD Business Big Data Company
Yi Zhou
Center for Social Research and Guanghua School of Management, Peking University
Abstract
This study revisits the association between bilateral relations and trade based on rare-event data from Integrated Data
for Event Analysis (IDEA). Our results suggest that a country imports more from another if the two countries are
friendlier. We further argue that states face two constraints when attempting to manipulate trade. First, they are
constrained by domestic institutions such as elections and congress. Second, they are constrained by international
institutions such as the World Trade Organization (WTO). Our results show that the imports of authoritarian
countries follow the flag of politics, but democratic countries’ imports are less likely to be affected by bilateral
relations. Moreover, WTO membership can gradually restrict democratic states from intervening on imports but has
little impact on authoritarian governments.
Keywords
bilateral relations, economic interdependence, institutional constraints, regime type, World Trade Organization
Introduction
How do bilateral relations intersect with trade? It has
been a central debate in the field of international political
economy for several decades. Many scholars have
explored the answer, but a consensus still has not been
reached. In this study, we revisit the association between
bilateral relations and trade. We emphasize that domestic
and international institutions are constraints condition-
ing the association.
Most previous studies on this topic can be classified
into two schools – ‘economics first’ and ‘politics first’
(Davis & Meunier, 2011). The ‘economics first’ school
emphasizes that economics is the fundamental reason
motivating countries to interact with others. This
hypothesis assumes that maximizing economic welfare
is the main objective for economic actors (e.g. consu-
mers, firms, and labor unions) or states. They will fully
consider the opportunity costs associated with losing
trade gains when participating in making foreign
policies. Therefore, interstate politics, mostly driven by
shifts in economic interests, has limited influence over
international business.
The origin of the ‘economics first’ school can be
traced back as far as Kant’s ‘commercial peace’ (Kant,
1795). As neo-classic economists claim, international
trade can make society economically better off than if
it stayed in autarky (Samuelson, 1962). If a state were to
initiate hostile or even military actions against its trade
partner, it would break their trade ties and then lose
some economic gains. Therefore, rational leaders will
count trade gains as a part of the opportunity costs asso-
ciated with hostile actions (Baldwin, 1980). The more a
pair of states trade with each other, the higher the oppor-
tunity costs will be, and the less likely it is that they will
take hostile actions against each other (Polachek, 1980).
Corresponding author:
yizhou@pku.edu.cn
Journal of Peace Research
2021, Vol. 58(6) 1207–1223
ªThe Author(s) 2021
Article reuse guidelines:
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DOI: 10.1177/0022343321992825
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Besides the logic of opportunity costs, another explana-
tion for ‘commercial peace’ is the signaling argument
(Morrow, 1999; Gartzke, Li & Boehmer, 2001), which
draws on insights from information asymmetry in the
bargaining model. More specifically, given that trade
creates economic gains for both sides, restrictive trade
policies can serve as a costly and credible signal that
expresses the sending state’s real resolve. The more two
states trade with each other, the more effective such
signaling tools will be.
Even if actors only aim to maximize economic wel-
fare, trade does not necessarily lead to peace. The gains
from trade liberalization are not equally distributed
across citizens, and some groups even lose. Whether
international trade promotes peace or not depends on
how various subnational actors’ interests are filtered by
domestic political institutions (Mansfield & Pollins,
2001; Kastner, 2007). For example, according to the
Heckscher-Ohlin model, holders of the relatively abun-
dant factor will gain from trade, but holders of the rel-
atively scarce factor will lose (Leamer, 1995). Suppose
holders of the relatively scarce factor are not adequately
compensated, and at the same time, they have a more
decisive influence on foreign policies; in this case, trade
may cause more interstate conflicts.
The ‘politics first’ school argues that actors sometimes
put security concerns before economic calculations.
According to neo-realism, trade-induced specialization
generates both efficiency gains and vulnerability for
states living in the anarchic global structure (Waltz,
1979; Mearsheimer, 2001). On the one hand, the gov-
ernment worries about the vulnerability associated with
compliance problems. For example, a high-dependent
country will lose trade gains and bear huge adjustment
costs if adversaries restrict its access to foreign markets.
As states have incentives to reduce vulnerability, eco-
nomic interdependence increases conflict and war
(Waltz, 1979). On the other hand, it also cares about
the relative distribution of gains between itself and its
trade partner. Grieco (1988) discusses how a state’s
defensive positionality constrains international coopera-
tion. Because there is no overarching authority to protect
against threat and violence in anarchy, the decline of
relative power will undermine a state’s security. There-
fore, a prudent leader may reject or restrict a trade tie that
provides all parties absolute gains but favors its partner
(Grieco, Powell & Snidal, 1993). In practice, states con-
sider the consequences of their allies’ and rivals’ relative
power besides economic profits when making trade pol-
icies (Gowa, 1994).
Copeland (1996, 2015) develops the theory of trade
expectations by considering national leaders to be
forward-looking actors. In this theory, a dependent state
may avoid hostile actions to enjoy the benefits of peace-
ful trading, as commercial liberalism predicts. Simulta-
neously, it also worries about vulnerability and may
initiate conflicts to manage dependence. Therefore,
states make foreign policies based on their future trade
expectations rather than on the current trade level. Fol-
lowing the trade expectation theory, Mansfield & Peve-
house (2000) argue that a preferential trading
arrangement (PTA) can improve the trade prospects
among its members. Thus, countries belonging to the
same PTA are more likely to cooperate and less likely to
have military disputes (Mansfield, Pevehouse & Bearce,
1999). In other words, multinational commercial insti-
tutions can mitigate commitment problems and foster
peace. Bearce & Omori (2005) further examine three
causal arguments for ‘co mmercial institutional peace’:
increasing economic opportunity costs of war, providing
private information, and overcoming commitment prob-
lems. They find empirical supports for only the third
argument. Commercial institutions reduce the outbreak
of military disputes by increasing contact and trust
among high-level state leaders. Mousseau (2000) shows
that, because of sharing in common market values, the
leaders of prosperous market democracies are more likely
to cooperate than others. In general, the trade expecta-
tion theory suggests that the factors affecting a leader’s
expectation of the future trade and investment environ-
ment are essential for understanding the interaction
between economic dependence and peace.
The hypothesis ‘trade follows the flag’ was formally
raised and examined by Pollins (1989b), and the subse-
quent studies further explore potential mechanisms.
First, countries choose their trade partners based on the
consideration of security. They may reject trade oppor-
tunities that are quite profitable and strengthen their
enemies (Gowa & Mansfield, 1993). Second, states
sometimes use trade policies as a strategic weapon for
gaining influence over international politics (Mastan-
duno, 1988). Last, political lobbying is not always prac-
tical, especially in authoritarian countries, where the
‘minimum winning coalition’ is relatively smaller (Gelpi
& Grieco, 2003).
1
When the government becomes more
1
‘Minimum winning coalition’ is defined as ‘the minimum size of
the coalition within the selectorate whose support leaders must enjoy
in order to attain and retain national leadership’ (Gelpi & Grieco,
2003).
1208 journal of PEACE RESEARCH 58(6)
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