Pollins 1989 Conflict, Cooperation and Commerce

Conflict, Cooperation, and Commerce: The Effect of International Political Interactions on
Bilateral Trade Flows

Author(s): Brian M. Pollins
Source: American Journal of Political Science, Vol. 33, No. 3 (Aug., 1989), pp. 737-761
Published by: Midwest Political Science Association
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Conflict, Cooperation, and Commerce:

The Effect of International Political
Interactions on Bilateral Trade Flows*
Brian M. Pollins, Ohio State University
The public choice approach to political economy is employed to gain insight into the connection between international politics and trade flows. A model is constructed in which importers are assumed to be rational utility maximizers who seek to satisfy international security as
well as economic welfare objectives. This model of bilateral trade flows reflects contemporary
theory in the field of international economics, and it explicitly incorporates the general foreign
policy orientation of importers among its determinants. The model is tested in 16 annual cross-
sectional estimations (1960-75) for a complete network of 25 countries. The findings show considerable support for the hypothesis that trade flows are significantly influenced by broad political relations of amity and enmity between nations. The author concludes that nations adjust
trade ties to satisfy security as well as economic welfare goals and that a formal political economy of trade should reflect this fact.
1. Introduction
International commerce is often affected by the vagaries of interstate
conflict and cooperation. Changes in international political relationships affect trade ties virtually on a daily basis, and so it is all the more surprising
that we have very little systematic knowledge regarding the relationship between interstate diplomacy and commerce. A look at published work shows
that our empirical knowledge about these relationships is sparse. At the

same time, formal theories of trade in economics and of conflict and cooperation in political science all but ignore the connections between these
forms of interaction. Indeed, despite rapidly growing attention in the social
sciences to the interdependence between economic and political spheres,
surveys of our literature find the theoretical work connecting international
economics and politics to be least developed (Frey, 1984, ch. 1; Polachek,

1985, p. 1273). The motivation for this study is to take a few steps toward
bridging the empirical and theoretical gap.
I shall present a model of bilateral trade flows, a model in the tradition
of rational, utility-maximizing ("public choice") political economy. I shall

*1 wish to thank Taehyun Kim for his highly competent and diligent research assistance.
I also benefited from the comments of my colleague Tom Milburn and the discussants on the
panel at the annual meeting of the Midwest Political Science Association, Chicago, 8-11 April
1987, where an earlier version of this paper was presented. Anonymous referees also gave very
helpful and constructive criticisms.
American Journal of Political Science, Vol. 33, No. 3, August 1989, Pp. 737-61
? 1989 by the University of Texas Press, P.O. Box 7819, Austin, TX 78713
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assume that importers include political as well as economic objectives in

their utility functions, and it is these multiple (and possibly conflicting) ob-
jectives that they seek to maximize subject to constraints. These objectives

are identified and operationalized, and the model is tested empirically using
a sample of 25 nations over the period 1960-75. While it is novel to include
international political ties as a determinant of imports, the model presented
here is intended as a contribution to a political economy of trade that in-
tegrates knowledge and insights from the disciplines of economics as well

as world politics. As such, it is hoped that the results will be useful to scholars
in both fields.
The body of this study is reported in the following five sections. I begin
by considering ways in which international political ties could affect the utility of various economic agents (individuals, groups, or nation-states) re-
sponsible for import decisions. These connections are discussed in section

2. Published literature in the fields of economics and political science most
relevant to this study will be surveyed in section 3. Next, I introduce a formal
model of bilateral trade in section 4. This model is a reduced form of a general equilibrium model of trade, and as such, all economic agents are specified as rational utility maximizers. Precise specification of the model and
its operationalization are treated in section 5, while the results of statistical
testing of the model are presented in section 6. The significance of the results
and implications for international relations and for trade theory are discussed in a concluding section.
2. How International Politics Affect Importers' Decisions

Trade flows are affected by the decisions of social actors at every level,
from individuals to interest groups to nation-states. Diplomatic climate and
changes in political conditions enter into these decisions in many and different ways, potentially complicating the modeling problem. Indeed, if I
sought to specify the process whereby international political factors affected

trade flows, no single, simple model could possibly suffice for all social ac-
tors. But if various economic agents employ a common logic in their decisions to import, the simple model I offer can lend some insight. And while
the real world of trade and politics is extremely complicated, I believe dif-
ferent economic agents do indeed employ a common logic, a logic that incorporates traditional security concerns into their import decisions. Specifically, I contend that importers (regardless of the level of analysis we
choose) take account not only of price and quality of goods and services but
of the place of origin of these products and the political relationship between
the importing and the exporting nation.1
'Exporters are also influenced by these factors, but for sake of simplicity this study examines only the import side of the relationship.
CONFLICT, COOPERATION, AND COMMERCE 739
In certain cases, such as boycotts, the revelation of these preferences

is made obvious. But in many other instances, the influence of security con-
cerns on trade decisions is less overt, though present and important nevertheless. Broadly speaking, I contend that import decisions will be affected
by (1) purposive attempts by the importer to exert influence over the ex-
porter by manipulation of their economic ties, (2) the general foreign policy
orientation or political alignment of the importer vis-a-vis the exporter, and
(3) the recent status of relations, that is, the climate of friendliness or hostility that exists between the importer and exporter. Let us consider these
in greater detail.
Overt attempts to exert influence using "economic weapons" is an un-
deniably important instance where political relations affect trade flows. But
many scholars (especially economists) consider such interventions to be idiosyncratic, even random. And as such, they exclude this type of behavior
from formal models of international trade because "long-run market forces"
are assumed to dominate (Frey, 1984, p. 2). There is no reason to believe

such an assumption is warranted. Moreover, the effect of international con-
flict and cooperation on trade flows is not limited to boycotts, embargoes,
or other direct attempts to influence the behavior of others.
Trade ties also change as a direct result of foreign policy alignments and
conflicts. These effects were observed when Egypt's political realignment in
1973 was followed by a radical reorientation of its trade ties in ensuing years.
Similarly, U.S.-Iranian economic ties were shredded by the reorientation of

Iran's foreign policy following the 1979 revolution, and British-Argentine
trade plummeted following the Falklands-Malvinas conflict. In short, trade
may be affected significantly by international political alignment and conflict, even though the state may not be employing trade ties as an instrument
of political influence.
At a still more subtle level, we can observe many cases in which the
warming and cooling of diplomatic ties between states is followed by expansion and contraction of their trade with each other. Trade and credit agree-
ments themselves may be part of this picture, and these will obviously
change patterns and quantities of exchange. But we also see this covariation
occurring more generally; that is, commerce is simply affected by the broad
political climate between nations. U.S.-Soviet trade before, during, and after Detente would be an example of this phenomenon as would the expansion of West German trade with the Eastern Bloc following Willy Brandt's
Ostpolitik, or the growth in U.S.-Egyptian trade in the wake of Camp

David. In other words, it is not only alignment and open conflict that can
affect trade but the broad orientation of states' foreign policies toward each
other.2
2This point was again recently illustrated in an interview given to Clyde Farnsworth of the
Newv York Times by Abel G. Abanbegyan, chief economic adviser to Mikhail Gorbachev. Com-
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Brian
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Pollins
Consider these connections now from the perspective of economic

agents who decide whether to import, how much to import, and from whom.
Import decisions made by individuals, interest groups, or national governments can be influenced by political as well as economic factors.
For national governments the point is clearly illustrated by many exam-
ples just discussed. Interest groups within society may include business elites
and unions threatened by imports, or lobbies with foreign policy interests
not primarily concerned with trade (e.g., the Israeli or Taiwan lobbies in the
United States). In any case, their activities in the domestic political arena
can often result in cooperative or conflictive political behavior by their national government toward a foreign power, and such behavior can result in
changes in trade flows (perhaps greater imports from Israel than pure market conditions would predict, or fewer imports from Japan).3 Finally, individual consumers consider nonprice or political factors in their import de-
cisions. To focus on a few extreme examples, witness the decision by some

West Germans to boycott South African grapes, or the reaction by Amer-
ican consumers to Stolichnaya vodka following the Soviet invasion of Af-
ghanistan, or to Toshiba products in the wake of that company's sale of sen-
sitive technology to the USSR. Again, the point is that the utility (and by
extension the behavior) of importers at any level of analysis is affected by
political as well as economic factors, and an explanation of trade behavior
that takes account of this fact should out-perform current trade theory,
which does not.
Intuitively, we might understand the "political" component of an im-
porter's utility in the following way. In addition to considerations of price

and quality, consumers may wish to express goodwill or solidarity toward
those whom they identify as friends, while shunning or punishing those they
perceive as foes. This may be especially true when products are identified
by their country of origin, as is usually the case in the world marketplace.
menting on the dependency of U.S.-Soviet trade upon the general political climate between
the superpowers, Abanbegyan stated, "Now that political relations are improving, economic
relations will improve in their time" (quoted in the New York Times, 14 December 1987, p.
32).
3There is an important and growing literature on the subject of interest group politics and
commercial policy that essentially explains changing levels of protection in terms of "demand"
for protection emanating from groups threatened by import competition and "supply" of protection produced by governments wishing to placate those groups. This work is an important
contact point between economists and political scientists. Representative works include Baldwin (1982), Finger, Hall, and Nelson (1982), and Marvel and Ray (1983). Without denying connections between domestic and foreign politics, my study differs from this literature in its use
of foreign policy and behavior as a determinant of trade flows rather than domestic politics as
a determinant of protection. The approach taken in this study is new, and I believe it can even-
tually complement the work on protection. I wish to thank an anonymous reviewer for urging
me to orient my study to the literature concerning the political economy of protection.
Moreover, considerations such as these may be a way of managing risk, that
is, an importer may avoid establishing ties with a seller in an adversary nation, knowing that those ties may be ruptured by one government or the
other as part of some foreign policy maneuver. Thus, in cases where price
and quality are roughly comparable, the buyer could choose a seller from
a friendly nation in order to minimize the possibility of economic disruption.

In sum, "political" factors in the utility function reflect very traditional security concerns; the desire to reward friends, to punish adversaries, and to
minimize risk.
There are then, many effects of international politics on trade flows,
from economic power plays such as sanctions to subtle but undeniable ties
between diplomatic climate and commercial relations. And politics plays a
part at all levels of decision making, from individuals to interest groups to
the state itself. It is important at this point to note that the security concerns
just delineated operate in essentially the same way across levels and different arenas. Namely, importers will behave in ways that will tend to decrease
trade with a particular partner when their political relations are becoming
more conflictive, and they will tend to increase trade with that partner when
political relations become more cooperative. Thus, I shall treat the relationship between trade and politics in an aggregated fashion by constructing a
model that includes all forms of interstate political behavior (not only the
most salient, such as boycotts), and I shall not distinguish among levels of
individual decision making.4
3. Relevant Literature in Political Science and Economics
The objective of this study is clear: I wish to identify theoretically and
measure empirically the effect of general diplomatic cooperativeness or hostility, amity or enmity, upon bilateral trade ties. Further guidance will now
be found in published work in economics and political science.
Literatures of greatest relevance to this study are four in number. The

first body of work includes important parts of mercantilist and neomercan-
tilist thought. Essentially, these writers examine the cultivation and exploitation of economic ties as instruments in the service of the state's larger foreign policy interests. The classic work in this area is A. 0. Hirschman's
(1980) National Power and the Structure of Foreign Trade. Hirschman's
ideas have been used in recent times to assess the efficacy of economic sanc-
tions (Hufbauer and Schott, 1985; Baldwin, 1985), while other writers have
examined trade patterns in light of lingering political ties between former
metropoles and colonies (Svedberg, 1981; Kleiman, 1976). And some have
'All data used in later analysis, however, is at the level of the nation-state, and inferences
will be made at that level only. It should be emphasized that standard international trade theory
is not clear regarding the level-of-analysis question, while the empirical literature in international trade also concentrates on nation-level data.
742
Brian
M.
Pollins
employed Hirschman's work to explore empirical connections between
trade ties and foreign policy compliance (Richardson and Kegley, 1980;
Richardson, 1976). Though highly relevant to my substantive interests, this
body of work offers no foundation for a theory of trade. Rather, it illuminates important aspects of the ties between international politics and commerce.
A second important literature includes the work of Solomon Polachek
(1980) and Ruth Arad and Seev Hirsch (1981, 1983). These writers begin
with assertions found in classical and neoclassical economics that "trade
brings peace." Polachek (1985, p. 1273) traces the notion to the nineteenth
century and before, and the same position is argued recently by Milton
Friedman (1980, pp. 43-44). Polachek and Arad and Hirsch provide a theoretical foundation for the relationship between trade and conflict, and con-
siderable empirical support for the model is presented in Polachek (1980)

and Gasiorowski and Polachek (1982).5 This school looks at the same variables of interest to my present study, but the direction of causality that they
examine is the opposite (i.e., they view trade as a determinant of dyadic political relations). Though based on a solid theoretical foundation compatible
with contemporary trade theory, theirs is a model of conflict, not trade, and
thus cannot serve as a foundation for this study. The model constructed in
my study can be seen as a complement to the efforts of the Polachek school.

In other words, this study could provide theoretical grounding and empirical
corroboration for the key assumption made by Polachek and Arad and
Hirsch.6
5One curious aspect of both the Polachek (1980) and Arad and Hirsch (1981, 1983) works
is their insistence that trade influences conflict, but conflict does not influence trade. In each
of the cited Polachek studies, empirical evidence is offered to support this hypothesized oneway causality. Arad and Hirsch argue that stronger Arab-Israeli economic ties would engender
political cooperation, but ignore the fact that increased trade between the Israelis and Arabs
presumes a prior lessening of hostilities or "normalization" of political relations. Likewise,
while East-West trade during the era of detente may have led to a further lessening of conflict
(this, in fact, is the focus of the cited Gasiorowski and Polachek, 1982, article), there can be
little doubt that the upturn in such trade at the beginning of that period resulted directly from
a prior improvement in diplomatic climate, not to mention specific trade and credit-extension
agreements. Their insistence upon one-way causation quite simply contradicts the key assumption in their theoretical argument; that is, that utility-maximizing agents are conflict-averse be-
caluse they realize that conflict inhibits commerce.
6The complementarity of my study and Polachek's points to an important question of

model specification. Ultimately, the causal relationship between international politics and commerce should be treated as reciprocal. In the long run, trade relations do affect interstate conflict and cooperation, and politics affects trade ties. But theory building is usually cumulative
and incremental, and the quantity and quality of current data does not readily permit testing
of complex, multiequation models in this area. Something can be learned here, even though
the model to be offered captures only a part of a larger reality.
A third body of work directly relevant to this-study is loosely known as
"transaction flow analysis." This tradition is grounded in the study published

by Richard Savage and Karl Deutsch (1960). The essential idea is that "in-
teresting pairs or groups" of actors within an exchange system can be iden-
tified by measuring their levels of interaction against a "null model" which

presumes that the preferences of any actor toward all others in the system
are neutral (Savage and Deutsch, 1960, p. 551). Although the relevance of
this approach is clear, I cannot base this study directly upon it because the
approach is not strongly grounded in prevailing trade theory (Savage and

Deutsch, 1960, p. 552; Tollison and Willett, 1973; Mayes, 1978, p. 10). In
this light, my study could be viewed as an attempt to secure such theoretical
grounding and identify political variables of relevance. Though I do not em-
ploy transaction flow analysis, I see my study as entirely consistent with the
original idea.
The fourth literature that informs my effort examines the effect of in-
stitutionalized political-economic cooperation upon trade flows. Aitken

(1973) has examined the effect of the Europen Free Trade Area and the
EEC upon trade in a 12-nation network. Pelzman (1977) measured the im-
pact of the Council for Mutual Economic Assistance (CMEA) upon the
trade ties of seven member states with each other and with 22 nonmembers.
Most recently, Brada and Mendez (1983) conducted a similar analysis for
these organizations as well as the Latin American Free Trade Area
(LAFTA) and the Central American Common Market (CACM). This

work, found exclusively in economics journals, is better grounded in pre-
vailing trade theory than is transaction flow analysis, but the treatment of
dyadic political relations is highly simplified. In particular, the effects of economic union in any form are measured by dummy variables that distinguish
members from nonmembers. Hence, there is no means for distinguishing
highly cooperative nation pairs from the weakly cooperative, and more se-
riously, there is no means by which the effects of dyadic conflict can be represented or measured.
Overall, then, we find a great deal of work which informs my present

study, but no single existing body of research satisfies the demands I have
made. I wish to have a model of international trade that takes account of
prevailing economic theory and that directly incorporates dyadic political
ties among its determinants-not simply as dummy variables, as in the economic integration studies, or as a residual, as in the transaction flow tradi-
tion. No such model presently exists, but the research just discussed provides a framework for such a model. In light of the economic integration
studies, our interests will be served best by looking to trade flow models
grounded in economic theory that are capable of incorporating additional
determinants in a consistent framework. Hence, my approach, design, and
744
Brian
M.
Pollins
operationalization-presented in the next two sections-begins with a brief

discussion of such trade models.
4. The Basic Model
This study is undertaken to improve our understanding of international
trade, and while the inclusion of political determinants is new, modeling the
flow of goods from one country to another is not. Some existing models are
well suited to our present needs, and consideration of their design will provide the foundation for my model. Bilateral trade flow models commonly
focus upon three basic determinants: (1) supply-side factors; that is, factors
influencing a nation's capacity to produce for the international market; (2)
demand-side factors; that is, factors shaping the capacity and desire of con-
sumers to buy goods from the world market; and (3) factors that impede international trade, or create what is often called trade "resistance."7
From this large family of modeling approaches, I find it useful for my
present purposes to employ the so-called "gravity" model. This formulation
was introduced over 20 years ago by Jan Tinbergen (1962), Pentti Poyhonen
(1963a, 1963b), Kyosti Pulliainen (1963), and Hans Linnemann (1966).
Gravity models are so named because the logic of argument resembles Isaac
Newton's formulation for the attraction of two physical objects. Specifically,
gravity trade models predict that the size of the trade flow between any two
partners (denoted PXij) will be a function of the economic size of each part-
ner (Yi and Y), and the "distance" between them (Rij). The determinants
are multiplicative rather than additive, and therefore, the equation is linear
when logarithms are taken on both sides. Hence, the basic gravity equation
can be expressed:
PXij
where
=
I
OYt1Y2Ri3
have
gij
included
(1)
log-nor
oretical relationship stochastically. This formulation stands firmly in the

mainstream of trade flow models in that supply-side factors are represented
by the size of the exporter, demand-side factors by importer size, and trade
resistance factors by the "distance" term.
Brada and Mendez (1985, p. 549) point out that this approach has been
successful for several reasons. For my purposes the most important among
these is that the gravity design is quite flexible because a variety of factors
affecting trade flows may be packed into, or unpacked from, the "resis7For example, some models focus upon the linkages between the national economy and
international exchange. Others focus upon the international transactions themselves. Difference in purpose will result in difference in indicator selection and model design. For a survey
of early work in this field, see Taplin (1967). More recent efforts are surveyed by Fair (1979).
Pollins (1982) discusses existing simulation models of international trade.
tance" term in the equation (Rij). This feat

my own hypotheses regarding interstate conflict and commerce into the
trade model.
The gravity formulation has been recently reworked by Jeffrey Berg-
strand (1985) so that the single-equation formulation (i.e., equation 1

above) can be related to a larger, multiequation, general equilibrium model
of trade.8 The bridge built by Bergstrand rests on the explicit inclusion of

relative prices in the equation, and his theoretical finding shapes my own
effort.9 Bergstrand's generalized gravity equation places us on firmer theoretical footing because of its demonstrated connection to the utilitymaximizing general equilibrium tradition. The explicit inclusion of prices
also answers the chief criticism of the original gravity formulation (Mayes,
1978, p. 11).
The addition of relative prices to equation 1 thus provides the foundation for my model. As we shall see in the next section, the flexibility of the
gravity formulation (and more specifically, the "resistance" term) permits
direct incorporation of an indicator of political conflict and cooperation. The
generalized gravity framework allows us to view the model as a reduced
form of a general equilibrium model of international trade. We now turn
to specific description of each term in the model and the operationalization
of indicators.
5. Refinement, Specification, and Operationalization of the Model
We shall look specifically now at the dependent and independent variables in the full model. Following the generalized gravity formulation, the
dependent variable is the level of trade between two countries. The inde-
pendent variables include the size of the importer and exporter, prices, and
"resistance." "Resistance" will be further unpacked in this model to include
geographic distance, economic union, and most important, my measure of
8General equilibrium models are widely employed in several subfields in economics be-
cause their logic grows directly out of the currently dominant neoclassical tradition. Essentially,
a general equilibrium model is one in which all agents are characterized as "maximizers" in
their behavior (e.g., producers behave in ways which maximize profit, consumers behave in
ways which maximize their utility). Clearly, prices are central because they affect profits as well
as consumer utilities. Note also that such maximizing behavior is not merely an assumption.
The behavioral equations in a general equilibrium model are specified in a way that all economic agents (say, importers and exporters in a trade system) will maximize a specified objective given identifiable constraints.
9More specifically, export prices (carried over from the export supply equation in the gen-
eral equilibrium model) and import prices (carried over from the demand side) must both be
included (see Bergstrand, 1985, pp. 475-77).
746
Brian
M.
Pollins
the general political climate (conflict and cooperation) between potential

trade partners. Let us examine each in turn.10
The model is designed to explain the level of trade between any pair of
countries. Conforming directly to all other models in this tradition, my dependent variable is the nominal value of imports by each importer (i) from
each exporter (j). The bilateral trade flow in any particular year is denoted
in the model by the term PXij.

The basic gravity formulation requires me to operationalize the size of
each importer and exporter. Again, like other gravity models, I employ
gross domestic product (GDP) as the size indicator for exporters as well as
importers.11 Importer size is denoted by the term Yi and exporter size by

yiY,.
Bergstrand's general equilibrium derivation of the basic gravity formu-
lation necessitates the inclusion of importer and exporter prices. Specifi-
cally, I begin by constructing two price indices using 1970 as the base year.
The export price index for each nation is taken directly from published in-
ternational sources and is assumed to be the price that that nation offers to
all potential buyers in the world market. A second index of import prices
is constructed for each nation by weighting the export price offered by each
supplier in the market by the share that each supplier holds in a specific im-
port market. This weighted average of export prices then becomes the
"world" price that a particular importer uses to compare the individual
prices offered by each supplier. Hence, the comparison of two prices-the
price offered by a particular seller to a calculated "world" price-becomes
central to the utility-maximizing logic of consumers in my model. 12 Exporter
"0Operational indicators for these variables are discussed in the text. Data sources for
those indicators are discussed in Appendix A.
"1Some have employed total population as well as GDP as indicators of economic size
(e.g., see Aitken, 1973). I decided against including a second indicator of economic size because there is disagreement in the literature about the direction of the relationship between
total population and trade (e.g., contrast Brada and Mendez, 1983, against Pelzman, 1977) and
because the empirical support for this variable (as reported in published studies) is not nearly
so strong as for other variables in the basic gravity model. In short, I assume the effects of economic size upon bilateral flows will be adequately captured by nominal GDP.
12Note that the "world" price is not the same for all consumers simply because each consumer has different preferences as to the kinds of goods he or she wishes to buy (e.g., some
consumers will be more interested in buying petroleum than others, while other consumers may
be particularly interested in high-tech manufactures). In other words, the prices seen by consumers vary in part because different consumers are shopping for different baskets of goods.
And such differences in consumer preferences should be given attention. This is why I weight
exporter prices for each individual importer according to the share that that exporter holds in
a particular importer's market.
price is constant for a particular exporter, and import price (i.e., "world"
price) is constant for each specific importer. But combining the two into a
single relative price means that the price term in my model will vary for each
modeled trade flow. I denote this relative price term Pi.

Treatment of the trade resistance term in the gravity model is central
to this study. My specification of trade resistance is shaped by two consid-
erations: (1) the approaches and findings of previous gravity models and (2)
my central interest in measuring the effect of conflictive and cooperative diplomatic relations upon levels of bilateral trade. I shall discuss these two considerations in turn.
The word "resistance," though commonly found in the gravity literature, is a misnomer, for it covers- factors that may encourage or facilitate bilateral trade as well as those which inhibit it. I focus here upon two of the
most widely used components of "resistance"; components which also happen to receive the strongest empirical support among the variety of factors
employed in published studies.
The first of these is geographic distance. By itself, distance carries little
theoretical interest (though recall its role in giving gravity models their
name). Some have employed geographic distance as a surrogate for trans-
port costs; others, for tariffs; still others, for cultural or linguistic similarity.
The simple fact is that all published gravity studies show that geographic distance is correlated with levels of trade between nations. Most important for
my present study, I suspect a priori that distance may also be correlated with
levels of conflict and cooperation between nations. If this is true, the exclusion of this variable could bias the estimate of the effect of conflict and co-
operation upon trade flows. Hence, geographic distance carries little direct
theoretical implication, but its presence as a control variable in my study is
important. The term will be denoted Di1.

A second "resistance" factor frequently found in these studies is a
dummy variable connoting common membership in an international trade

organization or economic union. Indeed, common membership by two
countries in an organization such as the European Community or LAFTA
should affect their bilateral trade flows, for the organizations are designed
to do just that. And like the distance variable, the inclusion of a measure
of institutionalized economic ties is important as a control, for there is good
reason a priori to expect common membership in such organizations to affect bilateral conflict and cooperation patterns as well as trade flows. Hence,
I include an economic ties variable as a control in this exploration of the ef-
fect of conflict and cooperation. The sample of nations used in my empirical

tests (described in the next section) includes members of four such organizations: the General Agreement on Tariffs and Trade (GATT), the Latin
American Free Trade Association (LAFTA), the Council for Mutual Eco-
748
Brian
M.
Pollins
nomic Assistance (CMEA), and the European Community (EC).'3 One
dummy variable is included for each organization, and they are noted
76A-r LAFTA jCMEA andEC

The final component of the "resistance" term, and the central focus of
this study, concerns the measurement of international conflict and cooper-
ation. Because I model bilateral trade flows, this measure should be specific
to each pair of nations. The Conflict and Peace Data Bank (COPDAB), an
events data series assembled by Edward Azar (1980) and associates, is well
suited to my purposes. Individual diplomatic events are coded according to
the initiator of the action, the target of the action, subject matter, classification of the action as conflictive or cooperative, and a scale weighting the
extent of conflict or cooperativeness embodied in the action. It is possible,
therefore, to mark the frequency and intensity of conflictive and cooperative
actions initiated by any of the nations in my sample toward any and all others. Basically, this is just what I do. But more detailed discussion of the con-
struction of my indicator is warranted. Its construction is informed by the

work of others who have employed events data, as well as by the design of
my model. The following discussion will reflect these influences in no particular order.
First, a practical consideration: because I work with annual observa-
tions of my dependent variable (levels of bilateral trade), my independent

variables must reflect the same time aggregation. Hence, I sum the daily
events coded in COPDAB into annual aggregates for each of the 16 years
of my study (1960-75). I retain the weightings that record the extent of cooperation or conflict embodied in each event. This results in annual observations of total weighted conflict and total weighted cooperation initiated
by each of the nations in my study toward each of the other nations.

Next, a decision was required whether to include conflict and coopertion flows individually or in some combination. I combine these two flows
in a single indicator for two basic reasons. First, a considerable amount of

published work employing events data finds strong covariation in the size
of conflictive and cooperative flows between dyads. A measure of general
cooperativeness or hostility between any pair of nations, then, is seen only
by comparing the two flows into some "net" flow. 14 Moreover, it is precisely
this general tone or climate in the diplomatic relations of nations that I contend affects their bilateral trade flows. Second, the form of the basic gravity
equation is multiplicative. Were I to include conflict and cooperation as in13j am indebted to an anonymous reviewer for the suggested inclusion of GATT membership in the model.
14Dixon (1983, pp. 831-32) is among those who discuss this point. Further references are
offered as part of his discussion on the pages cited.
dependent terms, the model would implicitly argue that a zero value in either
flow would result in no trade for that pair. This is simply inconsistent with
my theoretical claims, and therefore hostility can only be included as part
of a composite measure with cooperation.
I call my final measure weighted cooperation sent (Wij), and the formul
I employ is represented by equation 2.
IVy1-Ci1X
Cx
(2)
The central component of this flow is the annual amount of cooperation sent
by nation (i) to nation (j) (denoted Ci1 in equation 2). This number is the
same as in the weighted COPDAB data, aggregated to annual intervals, as
I have already discussed. This value is then diminished by the annual amount
of hostility sent by the same initiator to the same target (denoted H,J). If
there is no cooperative interaction between a pair of nations (i.e., there is
no interaction at all, or we find only hostile interaction), the value of this
indicator will be zero. Others have used a similar formulation when wishing
to capture hostile and cooperative interaction in a single nonnegative
measure. 15
Given the operationalization of each of my indicators, we may now turn

to model specification and a discussion of theoretical expectations regarding
the effect of each of the included determinants. As in classic gravity models,
my equational form is multiplicative. Hence, the specification is linear when
transformed into logarithmic form. Therefore, the error term (pmj) is assumed to be distributed log normal. My model, then, takes the following
form:
PX1A = 3TTstAFTA6 MEAP7 FC8pr9 (3)

My expectations about the effects of each of my chosen determinants
in unambiguous. First and foremost, the nominal level of imports by nation
(i) from nation (j) (i.e., PXij) should be positively associated with weighted
cooperation sent (Wij). This is wholly consistent with my discussion in section 2 regarding the effects of security concerns on trade. Hence, I contend
that a friendlier (i.e., more cooperative, less hostile) foreign policy orientation by one nation toward another will result in higher levels of imports
by that nation from the other. Conversely, a less cooperative or a more hostile foreign policy stance will result in a lower level of imports.
'5My measure of aggregate conflict and cooperation is equivalent to the numerator in Cusack's (1985) indicator of hostile intent. Were I completely to follow Cusack's lead, I could di-
vide equation 2 by all the weighted cooperation sent by nation (i), and thus measure cooperative intent. I do not employ this share logic in the present study simply because my dependent
variable is measured as an aggregate flow, not a share.
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Brian
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Regarding other variables in my model, I expect the economic size of
each partner (Yi and Y1) to contribute positively to the level of imports b
(i) from (j). This is because higher income in the importer is expected to
sult in a higher level of total demand, while higher income in the exporter
should indicate greater export capacity. Next, I expect that the higher the
price offered by a particular exporter, relative to an importer's world price,
the lower should be the level of trade between them. Hence, the coefficient
on the relative price term (Pi1) is hypothesized to be less than zero. Geo-
graphic distance (Dij), associated with transportation costs and other inhibitors of trade, is also expected to carry a negative sign. Finally, the dummy
variables marking institutionalized economic ties between nation pairs
should be associated with higher levels of trade, as such institutions operate
in ways to remove trade barriers and to encourage exchange. Hence, I ex-
pect positive coefficients on t;ATI tAFTA 1MEA and TEC We can now
turn to the estimation of equation 3 and the testing of these hypotheses.
6. Empirical Results
I empirically test my model by tracking the trade flows between 25 na-
tions during the years 1960 to 1975. I therefore trace 600 trade flows for 16
years. Primary interest, of course, is in the size and statistical significance
of interstate diplomatic relations in the determination of international trade
flows. Accordingly, I have chosen nations that are diverse in their foreign
policy orientations as well as their international economic ties, levels of de-
velopment, and modes of production.'6 My sample includes seven advanced, industrial, market economies; four members of the Council for Mu-
tual Economic Assistance (CMEA); five members of the Organization of
Petroleum Exporting Countries (OPEC); and nine other developing

countries. 17 Clearly, this is not a random sample but one chosen to include
the major actors in the contemporary global economy, as well as to represent current East-West and North-South cleavages. Ordinary least squares
regression is employed for each annual cross-section (N = 600) because I

wish to identify the long-run responsiveness of bilateral trade flows to chang-
16The gravity design assumes fundamental similarity (i.e., "homogeneity") among nations
in production techniques and consumption preferences. The diversity of nations in my sample
does not warrant such assumptions a priori. I shall deal with this question later in this section.
17Advanced market economies in this study are the United States of America, Canada, the
United Kingdom, France, the Federal Republic of Germany, Italy, and Japan. CMEA members included in the sample are the Soviet Union, the German Democratic Republic, Poland,
and Czechoslovakia. Included OPEC members are Venezuela, Nigeria, Iran, Saudi Arabia,
and Indonesia. The nine non-OPEC developing countries among the 25 nations are Mexico,
Brazil, Argentina, the Union of South Africa, Turkey, Egypt, the People's Republic of China,
India, and Pakistan.
ing international political relations.18 Finally, because the direction of cau-
sality in the relationship between diplomacy and commerce is in question,

I reestimate equation 3 each year, using lagged values of my key indepen-
dent variable, weighted cooperation sent (Wij).19

Primary interest is in the size and statistical significance of the conflict
and cooperation indicator, weighted cooperation sent (Wij). As shown in the

accompanying table of results, theoretical expectations are confirmed, as all
estimated coefficients for each of the 16 years in the study are in the hypoth-
esized direction for contemporaneous as well as lagged values of Wij. Results

are displayed by annual cross-section. For each year the first two rows of
estimates show the coefficients and t-statistics for each variable when contemporaneous values of weighted cooperation sent are employed, while the
second two rows show coefficients and t-statistics for each variable when
one-year lagged values of Wij are employed. In 15 annual estimations wher

the observation of weighted cooperation sent is contemporaneous with
nominal imports, the coefficient is statistically significant at the .01 level.
This level of significance is attained for all 16 estimations using one-year
lagged observations of Wi1. Moreover, I note that the values of this coeff
cient vary little from year to year, or between contemporaneous and lagged
observations on weighted cooperation sent, and this give me confidence that

the estimates are robust. I am indeed measuring a long-run relationship.20
The adjusted R2(T2) for each estimated year is also displayed in the result table. The total amount of variance explained by my model is very much
like that of other cited studies employing the gravity design, though direct
comparision is impossible because I use a different sample of countries and

cover different years. In short, gravity models typically capture between 40
and 60 percent of the total variance in bilateral trade flows, and my results
fit this pattern.21
"8Time series estimation of individual nation pairs could not be expected to yield clear results because I have only 16 annual observations in this data set. And pooled cross-section timeseries estimation would confound short-run, year-to-year changes in posited relationships with
the longer-term effects I wish to identify. For a study such as this, annual cross-sections are
preferred (Prewo, 1978, p. 342), and most estimation work using the gravity model has followed
this estimation strategy.
19Again, I am indebted to an anonymous referee for urging me to report my lagged results.

More sophisticated statistical tests for the direction of causality (such as Granger-Sims proce-
dures) are of doubtful value here because I am limited to 16 annual observations.

20While the raw values for weighted cooperation sent are somewhat skewed, the multiplicative form of the model leads me to log all observations. The distribution of the logged val-
ues of WIJ is approximately normal by visual inspection as well as skewness and kurtosis sta-
tistics. Indeed, the distribution associated with each variable in the model appears normal.
21Of course, we do know that the inclusion of WI] improves the adjusted R2 for sampled
nations and years compared to models that do not take conflict and cooperation into account
because the t-statistics associated with the WI, coefficient are so high.
TABLE 1
Statistical Results
(GATT) (LAFITA) (CMEA) (

Wii Yi Yi Dij Tij Tij Tij T
1960a 0.275 0.794 0.808 -0.710 1.342 -1.833 1.793 0.857

(4.38) (10.5) (10.8) (5.88) (4.18) (1.41) (1.34) (0
0.210 0.800 0.793 -0.698 1.364 -1.142 1.382 1.0
(3.21) (10.1) (10.2) (5.54) (4.22) (0.88) (1.02) (0
1961a 0.286 0.796 0.844 -0.737 1.246 -1.559 0.974 0.71

(4.51) (10.3) (11.2) (6.36) (3.93) (1.23) (0.74) (0
0.283 0.837 0.885 -0.683 1.306 -1.921 1.696 0.9

(4.60) (11.3) (12.2) (5.78) (4.14) (1.50) (1.29) (0
1962a 0.315 0.825 0.868 -0.659 1.098 -1.087 1.053 0.95
(5.47) (11.0) (12.0) (5.69) (3.48) (0.84) (0.80) (0
0.308 0.817 0.839 -0.658 1.041 -0.340 1.292 0.9
(4.84) (10.6) (11.2) (5.63) (3.27) (0.27) (0.97) (0
1963 0.185 0.881 0.877 -0.693 0.859 1.195 1.850f 1.50
(3.24) (12.1) (12.2) (6.28) (2.90) (0.94) (1.90) (1
0.316 0.831 0.866 -0.693 0.758 -0.122 1.154 0.9
(5.90) (11-8) (12.7) (6.48) (2.62) (0.10) (1.20) (
1964 0.300 0.833 0.880 -0.615 0.755 0.837 2.078e 1.339
(5.36) (12.1) (13.2) (5.68) (2.68) (0.69) (2.25) (
0.228 0.848 0.869 -0.702 0.747 1.473 1.689f 1.
(4.11) (12.1) (12.52) (6.59) (2.63) (1.21) (1.80) (
1965 0.302 0.903 0.919 -0.569 0.789 0.599 1.590f 1.406

(5.63) (13.9) (14.0) (5.24) (2.83) (0.69) (1.72) (
0.301 0.843 0.869 -0.596 0.754 0.715 2.152e 1.3
(5.36) (12.3) (12.9) (5.53) (2.69) (0.83) (2.33) (
1966 0.356 0.816 0.902 -0.480 0.840 0.494 1.549f 1.185
(6.87) (12.3) (13.9) (4.41) (2.99) (0.57) (1.66) (
0.329 0.893 0.953 -0.479 0.930 0.588 1.604f 1.613 -
(6.05) (13.9) (14.8) (4.32) (3.28) (0.67) (1.70) (1.29)
1967 0.300 0.903 0.945 -0.518 0.761 0.147 1.544f 1.191 -1
(5.68) (13.7) (14.5) (4.67) (2.91) (0.16) (1.65) (0.95)
0.343 0.865 0.937 -0.520 0.843 0.550 1.490 1.269 -
(6.65) (13.0) (14.6) (4.80) (3.26) (0.63) (1.61) (1.02)
1968 0.352 0.859 0.946 -0.705 0.739 -0.182 0.864 0.606 -1
(6.67) (12.8) (14.4) (6.62) (2.74) (0.20) (0.91) (0.48)
0.349 0.871 0.937 -0.558 0.770 0.031 1.275 1.098 -
(6.47) (13.0) (14.1) (4.98) (2.85) (0.03) (1.35) (0.87)
1969 0.235 0.889 0.996 -0.676 0.756 2.092e 1.079 1.385 2.
(4.05) (12.6) (14.3) (6.14) (2.74) (2.34) (1.09) (1.07)
0.368 0.855 0.981 -0.684 0.787 0.466 0.873 0.664 2
(7.06) (12.8) (14.7) (6.49) (2.95) (0.51) (0.93) (0.53)
1970C 0.261 0.874 0.987 -0.675 0.942 1.308 1.467 1.21
(4.15) (11.9) (14.1) (6.01) (3.47) (1.40) (1.48) (
0.261 0.890 0.997 -0.658 0.836 2.025e 1.034 1.3
(4.44) (12.5) (14.4) (5.85) (3.07) (2.23) (1.03) (
1971 0.242 0.952 1.142 -0.684 1.334 2.499d 1.814f 1.122 5.
(4.02) (13.7) (15.4) (6.30) (5.10) (2.82) (1.88) (0.87)
0.269 0.924 1.145 -0.664 1.341 1.464 1.702f 1.005 6
(4.42) (13.1) (15.6) (6.10) (5.14) (1.61) (1.76) (0.78)
1972 b 0.218 1.052 1.236 -0.718 1.200 2.002e 1.983e 0.803 4.
(3.87) (15.5) (17.6) (6.55) (4.49) (2.31) (2.13) (0.64)
0.239 1.042 1.217 -0.727 1.036 2.582d 1.488 0.566 4
(3.76) (15.1) (17.0) (6.64) (3.85) (3.01) (1.57) (0.45)
1973 b 0.238 1.036 1.219 -0.567 1.062 1.762f 2.336e 0.481 1
(3.76) (13.4) (15.5) (4.74) (3.97) (1.90) (2.43) (0.50)
0.235 1.074 1.261 -0.605 1.065 2.247e 2.134e 0.400
(4.10) (14.0) (16.8) (5.18) (3.99) (2.52) (2.22) (0.42)
TABLE 1 (continued)
Statistical Results
(GATT) (LAFTA) (CMEA) (EC)
Wi Yi i y1 D1j Ti Tij Ti, T
1974 0.317 1.059 1.178 -0.628 1.216 1.756f 1.459 0.743 0
(5.45) (13.2) (13.3) (5.45) (4.49) (1.83) (1.43) (0.75
0.299 1.038 1.196 -0.515 1.292 1.822f 2.268e 0.373

(4.82) (12.4) (13.5) (4.32) (4.74) (1.88) (2.25) (0.37)
1975 0.036 1.136 1.386 -0.752 1.030 2.409e 2.126e 0.719 -0
(0.59) (13.6) (15.8) (6.16) (3.72) (2.46) (2.06) (0.71)
0.342 0.984 1.231 -0.741 1.059 1.144 1.234 0.461 -
(5.93) (12.1) (14.1) (6.54) (3.95) (1.21) (1.23) (0.47

NOTES: 1. Coefficients are those for logged values (ln) of model variables.
2. T-statistics are displayed in parentheses below each coefficient. N = 600.
3. In each year the top equation is with the contemporaneous value of the weighted c
one-year lagged value.
4. Coefficients associated with weighted cooperation sent (WJ) are significant at the .01 level f
values. They are significant at the .01 level for each year 1960-74 and are not significant for th
raneous value.
5. Coefficients associated with Y,, Yj, Dq, T, for GAIT and the constant (P0) are statistically
6. Statistical significance of remaining coefficients is noted below.
aCzechoslovakia is excluded from estimation due to missing data on GDP. N = 552.

bChina is excluded from estimation due to missing data on GDP. N = 552.
cBase year. All prices equal 100.0, hence P,, excluded from estimation.
dFor T,,'s except that for GATT, and P,, only: coefficient significant atp < .01.
eFor T,,'s except that for GATT, and P,, only: coefficient significant atp < .05.
fFor TI,'s except that for GATT, and Pt, only: coefficient significant at p < .10.
I also feel confident that I have accounted for rival hypotheses regarding
this relationship between diplomacy and commerce, for the included variables found in the conventional gravity model (geographic distance, size of
the importing and exporting nation, and common membership in an eco-
nomic organization) act as controls in my model.

Let us examine the results for other variables in the model, as this serves
to frame my findings in relation to others'. The indicators of importer size
and exporter size prove to be highly significant and robust. This is consistent
with all other published studies that employ the gravity approach. Similar
comments can be made regarding the geographic distance variable (Dij). I

too find that distance inhibits trade and that all estimates are statistically significant. The magnitude of my estimates for the coefficients on this variable
are also very close to those in published studies.
The relative price term in my equation does not perform nearly as well
as the four variables just discussed. The coefficient carries a sign counter to
theoretical expectations in five of the 15 years in which this variable is in the

estimating equation, and in two of those years (1971 and 1972) that "wrong"
sign is statistically significant. In only four of the 15 yearly estimates includ-
ing Pij do I find its coefficient to be carrying the expected sign and to be statistically significant. On the other hand, the performance of the price terms
in Bergstrand's (1985) study was much the same. In other words, my results,
like Bergstrand's, indicate that the inclusion of this variable requires a
greater interest in theory than in curve-fitting.22
The estimates pertaining to the effects of institutional economic ar-
rangements (;A7T/AITA 1jMEA and T7c) are almost always in the posited direction, but their explanatory power varies greatly by organization.23
The General Agreement on Tariffs and Trade (GATT) is an important pre22There are many possible explanations for the poor performance of the relative price
term. Trade modelers have long bemoaned the low quality of price data, while some would
suspect that the aggregation of all commodities into a single "good" might mask the true effects
of prices upon trade. Whatever the possible explanation, it is interesting to note that other variables in the model were not confounded by data quality or aggregation.
23Members of the GATT over the entire estimation period include the United States, Canada, Great Britain, France, the Federal Republic of Germany, Italy, Japan, Czechoslovakia,
South Africa, Turkey, India, Pakistan, and Indonesia. Nigeria joined in 1960; Argentina and
Poland became full members in 1967; and Egypt joined in 1971. The included members of
LAFTA are Mexico, Brazil, and Argentina for the entire 1960-75 period of study, and Ven-
ezuela beginning in 1965. CMEA members include the Soviet Union, GDR, Poland, and
Czechoslovakia. The CMEA was founded in 1949; hence, group membership was in effect
throughout the period of this study. European Community members among the 25 are France,
FRG, and Italy for the entire period, and the United Kingdom beginning in 1973. Though some
may question my specification of the centrally planned CMEA as similar to market economy
organizations such as the EC, I follow Pelzman (1977) and Brada and Mendez (1985), who offer
empirical support for treatment of the CMEA as a customs union like the EC or LAFTA.
756
Brian
M.
Pollins
dictor of trade flows. The coefficient associated with common GATT membership is statistically significant in every annual cross-section. The coeffi-
cient for the Latin American Free Trade Area (LAFTA) is the lone
coefficient associated with the "economic ties" variables to carry a negative
sign. The negative sign appears in the early years of my series of estimations,
which happen to coincide with the early years of LAFTA. Brada and Mendez (1983, pp. 594, 600) also report a negative coefficient associated with
LAFTA in their pooled estimates over a similar time period. Also conforming to my results, Brada and Mendez (1985, p. 553) show positive coeffi-
cients on this term for annual estimates in the 1970s.

Regarding the CMEA, my results are consistent with those of Pelzman
(1977). Specifically, Pelzman finds that this organization contributed signif-
icantly to shaping the trade patterns of members only after the organization's "Basic Principles" were adopted in 1962 (Pelzman, 1977, p. 720). In
regressions where weighted cooperation sent (Wij) was deliberately

cluded, the coefficient associated with the CMEA dummy variable was positive and statistically significant at the .05 level in 12 of the 13 years I esti-
mated following adoption of the "Basic Principles."24 It is all the more

interesting, therefore, that this coefficient is smaller in size and less often
significant when weighted cooperation is included. My results indicate that
the CMEA as an organization is less of an influence upon member trade relations than the current literature suggests, when one explicitly takes account of their general patterns of international political cooperation and
conflict.
The coefficient associated with European Community membership is always in the posited direction, but it never reaches statistical significance.
This is true even in associated regressions where Wi, is excluded from t

equation. I can only conclude that common membership in the EC is not
a good predictor of bilateral trade flows for this chosen group of 25 nations. 25
Based on these results, I am confident that I have identified a clear association between the general foregin policy orientation of one state toward
241 performed several associated regressions to explore similarities and differences between my findings and others or to control for additional variables that the literature suggested
might affect my main results. While a number of these runs will be touched upon below, I display only the results of my main theoretical model in the interests of saving space. However,
in this and all other instances where associated regressions bear discussion, I shall provide run
results to all interested readers.
25In addition, several auxiliary regressions were run to test the underpinnings of the mo
and additional explanatory factors. Specifically, the homogeneity assumption of gravity models
was tested and found not to be a problem in these estimates (see note 16). Other tests disaggregated the price term and included inflation rate differentials and exchange rate movements
(in order to replicate Bergstrand's study). Given the focus of this study and the empirical results
of these tests, I decided to exclude these additional factors from the final model.
another (in terms of cooperativeness or conflict) and the level of imports by
that nation from the same partner. International conflict and cooperation affect commerce significantly and continuously, and in a way which directly re-
flects the security concerns delineated in this study. The relationship is not idiosyncratic or random; the evidence strongly suggests that importers do
indeed take account of the international political orientation of exporters
in relation to themselves and of the relative risks associated with importing
from friends and adversaries. Future work exploring international economic

ties should take account of this fact.
7. Conclusions
The "public choice" approach to political economy has been shown
here to be capable of supporting a model of international trade flows that
directly incorporates international political objectives and behavior. In addition, empirical estimations of this model support the hypothesis that
weighted cooperation sent, my indicator of bilateral cooperation and conflict, is positvely associated with levels of bilateral trade. This estimated relationship is statistically significant and robust. Based on the results of this
study, therefore, further effort to explicitly and directly incorporate variables concerning state-to-state political relations into models of international economic exchange is certainly warranted.
Because this model builds directly on current empirical trade theory,
and because it utilizes the "public choice" paradigm currently so important

in many subfields in political science, it is hoped that this study might contribute to efforts by economists as well as political scientists to understand
connections between international politics and commerce. Opportunities

for bridge building remain great. Three possible directions readily suggest
themselves.
First, the model discussed in this paper is specified at a very high level
of aggregation. The cross-sectional estimations force a common parameter
estimate for each variable upon all nation pairs in the study. Though these
estimates are sound, there may be important, patterned variation across dyads that this design cannot pick up.26 The responsiveness of bilateral economic exchange to changing political conditions may vary, say, between
great powers and small states, between oil exporters and those highly de-
pendent upon them, or between allies and those in an opposing bloc. There
are many plausible ideas such as these that deserve specification and testing,
quite possibly within theoretical frameworks other than the gravity model
chosen for this study. The theoretical work of Hirschman and others who
26ln a subsequent study, I employed a similar model to examine and compare the import
behavior of six diverse nations. The results are entirely consistent with the theoretical thrust
of this study and do reveal interesting cross-national differences (Pollins, 1989).
758
Brian
M.
Pollins
have explored the importance of international political and economic asymmetries could inform such an exploration and perhaps benefit from it.
Second, the rapidly developing literature on the political economy of
protection offers a promising bridge point in different ways. My model does
not address this important domestic source of commercial policy, and incorporating the theory and findings of this school might move us toward a more
complete understanding of trade flows. By the same token, the protection
literature takes no account of broader international political objectives that
influence trade behavior, while my study demonstrates that such factors
matter. Integration of this work may be facilitated by the fact that the formal
approach in theory building and empirical testing is the same in both cases.
Third, my statistical results give empirical content to the key assumption
made by Polachek (1980) and Arad and Hirsch (1981, 1983), who model international conflict as a function of trade ties. The model presented in this
study also provides a theoretical basis for their basic claim. And once again,
the formal approach taken in these studies is the same, and thus the chances
of integration are greater. My study shows that nations will adjust their commercial relations to satisfy security objectives even as they attend to economic concerns such as production capacity, prices, and transportation
costs. The work of Polachek and others shows that nations will adjust their
conflictive and cooperative behavior to satisfy economic welfare objectives.
Taken as a whole, all this work shows there is good intuitive, theoretical,
and empirical reason to specify the relationship between international politics and commerce to be reciprocal; changes in either one influence the
other. Internationally, concerns for economic welfare and security are very
much intertwined, and formal theory that specifies these interconnections
is certainly warranted.
Thus the theoretical and empirical steps taken in this paper move us in
promising directions. The results of this study clearly indicate that security
concerns as well as comparative advantage shape the international trade system, and we now have some idea how. This study also shows that it is pos-
sible to develop models that incorporate political and economic objectives

in models of international economic exchange. At the same time, it is clear
that we have much more to learn about the relationship between international trade and politics, for many important questions cannot be addressed
at the level of aggregation that I have employed here. There are rich possibilities for progress on many fronts.
Manuscript submitted 19 September 1986
Final manuscript received 16 December 1988
APPENDIX A
Sources employed in this study (by variable) are:
Nominal Bilateral Imports (PXz,). The direction of trade data tapes offered by the International Monetary Fund provided the main source for this variable. Mistakes found by me on
that tape (e.g., misplacement of the decimal point for the imports of some developing countries) were corrected by comparision to multiple other sources (usually the United Nations
yearbooks) and by comparison to figures reported by their trade partners on the IMF tapes.
Occasional missing values on these tapes were filled by looking into the IMF's Direction of
Trade Yearbook and to various UN sources. For CMEA members, time series data generated
by the Vienna Institute for International Economic Comparisons (WIIW) were employed.
WIIW converts the internal CMEA figures into current dollars based upon country-by-country
price comparisions, and these figures were used. For China, various reports of the Joint Eco-
nomic Committee of the U.S. Congress and the National Foreign Assessment Center (NFAC)
of the Central Intelligence Agency were employed.
Weighted Cooperation Sent (Wa,). The Conflict and Peace Data Bank (COPDAB) was th
source for the raw data for this indicator (Azar, 1980). Construction of the indicator itself is
discussed in the main text of this paper.
Gross Domestic Product (Y,, Y). The United Nations Yearbook of National Account Statistics was the main source. As with the trade variable, WIIW data were employed for some
years for CMEA members, and U.S. government sources supplied data for China.
Geographic Distance (D1). Latitude and longitude (in degrees, minutes, seconds) for port
cities and major economic centers were recorded for each of the included 25 nations. Great
Circle Distance between the nearest two such cities for each country pair was then computed.
The formula is standard.
Economic Ties (T1). Nations are coded as members beginning in their first full year of
membership in the specified orgnaization. See note 24.
Relative Prices (P1). For most countries, multiple sources were consulted and compared.
The main sources were the UNCTAD Yearbook, World Bank's World Tables, IMF International Financial Statistics, and the UN Yearbook of International Trade Statistics and Monthly
Bulletin of Statistics.
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Conflict, Cooperation, and Commerce: The Effect of International Political Interactions on

Bilateral Trade Flows

Conflict, Cooperation, and Commerce:

International commerce is often affected by the vagaries of interstate

that our empirical knowledge about these relationships is sparse. At the

economics and politics to be least developed (Frey, 1984, ch. 1; Polachek,

of rational, utility-maximizing ("public choice") political economy. I shall

assume that importers include political as well as economic objectives in

jectives that they seek to maximize subject to constraints. These objectives

tegrates knowledge and insights from the disciplines of economics as well

sponsible for import decisions. These connections are discussed in section

its operationalization are treated in section 5, while the results of statistical

2. How International Politics Affect Importers' Decisions

sought to specify the process whereby international political factors affected

CONFLICT, COOPERATION, AND COMMERCE 739

In certain cases, such as boycotts, the revelation of these preferences

are assumed to dominate (Frey, 1984, p. 2). There is no reason to believe

flict and cooperation on trade flows is not limited to boycotts, embargoes,

or other direct attempts to influence the behavior of others.

Similarly, U.S.-Iranian economic ties were shredded by the reorientation of

Ostpolitik, or the growth in U.S.-Egyptian trade in the wake of Camp

Consider these connections now from the perspective of economic

cisions. To focus on a few extreme examples, witness the decision by some

ican consumers to Stolichnaya vodka following the Soviet invasion of Af-

ghanistan, or to Toshiba products in the wake of that company's sale of sen-

Intuitively, we might understand the "political" component of an im-

porter's utility in the following way. In addition to considerations of price

CONFLICT, COOPERATION, AND COMMERCE 741

Moreover, considerations such as these may be a way of managing risk, that

a friendly nation in order to minimize the possibility of economic disruption.

The objective of this study is clear: I wish to identify theoretically and

Literatures of greatest relevance to this study are four in number. The

employed Hirschman's work to explore empirical connections between

A second important literature includes the work of Solomon Polachek

siderable empirical support for the model is presented in Polachek (1980)

my study can be seen as a complement to the efforts of the Polachek school.

caluse they realize that conflict inhibits commerce.

6The complementarity of my study and Polachek's points to an important question of

CONFLICT, COOPERATION, AND COMMERCE 743

A third body of work directly relevant to this-study is loosely known as

"transaction flow analysis." This tradition is grounded in the study published

teresting pairs or groups" of actors within an exchange system can be iden-

tified by measuring their levels of interaction against a "null model" which

approach is not strongly grounded in prevailing trade theory (Savage and

stitutionalized political-economic cooperation upon trade flows. Aitken

(LAFTA) and the Central American Common Market (CACM). This

Overall, then, we find a great deal of work which informs my present

prevailing economic theory and that directly incorporates dyadic political

determinants in a consistent framework. Hence, my approach, design, and

operationalization-presented in the next two sections-begins with a brief

oretical relationship stochastically. This formulation stands firmly in the

CONFLICT, COOPERATION, AND COMMERCE 745

tance" term in the equation (Rij). This feat

strand (1985) so that the single-equation formulation (i.e., equation 1

of trade.8 The bridge built by Bergstrand rests on the explicit inclusion of

5. Refinement, Specification, and Operationalization of the Model

geographic distance, economic union, and most important, my measure of

the general political climate (conflict and cooperation) between potential

in the model by the term PXij.

importers.11 Importer size is denoted by the term Yi and exporter size by

Bergstrand's general equilibrium derivation of the basic gravity formu-

lation necessitates the inclusion of importer and exporter prices. Specifi-

central to the utility-maximizing logic of consumers in my model. 12 Exporter

CONFLICT, COOPERATION, AND COMMERCE 747