Over the past 50 years, trade has increased proportionally more than GDP, and the world now trades three times more its output than before. At the same time, military spending, as a percent of world GDP, also fell significantly.
Is there a relationship between the two? Montesquieu saw that the effect of trade was to bring peace, already in the 18th century. Certainly, if war disrupts trade and its benefits, then those retaining the rents from trade should invest ressources in preventing war and in cooling down tempestuous leaders.
But does trade really reduce war? This paper by Philippe Martin et al shows that an increase in trade between two countries reduces the probability of a conflict between them. As world trade is booming, are we heading towards world peace?
Alas, no. If small neighbors trade more with a distant third, they have less to lose from a war between themselves. Trade matters, but the pattern of trade matters even more. Take India and Pakistan. Both of them are trading more with the outside world. Hence, they have less to lose from going to war with each other. Globalization reduces global wars, and the distance of conflicts, but it also reduces the opportunity cost of local conflicts. Regional trade agreements, by creating strong trade links, bind countries together, and promote a regional peace.
