Bilateral Trade and Political Conflict/Cooperation: Do Goods Matter?

Abstract

This article investigates Granger causality between political conflict/cooperation and bilateral trade. The measures of conflict/cooperation are constructed by accumulating daily events and splicing the two datasets of the Conflict and Peace Data Bank and the World Events Interaction Survey. Trade data from the United Nations include ten commodity groups as well as total trade. Quarterly data are analyzed from the very early 1970s to the early 1990s for four dyads of USA-USSR, USA-China, Turkey-Greece, and Egypt-Israel. Yearly data are investigated from the early 1960s to the early 1990s for 16 dyads. Granger causality between bilateral trade and conflict/cooperation is generally reciprocal in most goods and dyad dependent, but independent of whether or not two countries are political rivals. For USA-USSR and USA-China, however, there is a tendency for bilateral trade to increase in some goods when political relations improve. For USA-USSR, in particular, causality from conflict to trade is pronounced in more goods than causality from trade to conflict. While the effect of cooperation in these dyads is mostly positive, the effect of an increase of trade on conflict is generally ambiguous. For 20 dyads collectively, conflict/cooperation tends to Granger-cause bilateral trade in minerals, iron and steel, fuels, basic manufactures and control and scientific equipment; whereas bilateral trade somewhat more frequently Granger-causes conflict/cooperation in food and live animals, beverages and tobacco, and machines and transport equipment. The concept of strategic goods, much debated in the literature, is further discussed in light of these results. The general result of reciprocal Granger causality calls for a model in which both bilateral trade and conflict/cooperation are simultaneously determined. Such a simultaneous equations model is briefly sketched.