Explaining the commercial peace: Costs, information, and signaling

Over the last several years, dozens of quantitative studies have analyzed the relationship between economic interdependence and conflict. Most studies show that it decreases the likelihood of war. This thesis delves more deeply into why the relationship holds. The dissertation compares what three different explanations say about the relationship between interdependence and conflict. Each of the explanations for the liberal peace flows from a general model of international conflict that sees war as a bargaining failure. As such, each focuses on the variables that determine when a war can occur in such models: costs of war or uncertainty. The first explanation argues that interdependence decreases conflict because states want to avoid costs associated with the disruption of trade if they fight a war. The second and third explanations contend that trade may affect the likelihood of conflict because trading states have less uncertainty about each other. There are two ways that states can get information regarding one another's policy, power, and preferences. First, trading states have incentives to learn more about their partners' political systems, and they do so through frequent interactions between high officials and by the diplomatic presence they have in other countries. Second, interdependent states can signal their resolve through costly signals, such as economic sanctions. The thesis makes explicit the theoretical argument of each explanation and tests hypotheses derived from the theories. These hypotheses go beyond the simple association of trade and peace to examine additional implications of the costs and information arguments, thus helping to adjudicate between them. The findings support the idea that economic interdependence increases the range of peaceful bargains that states prefer to an outcome decided by conflict if they have a reasonable level of interaction. But crucially, interdependent states have more information about their trading partners, and this facilitates conflict resolution. Having information about the other state's reservation point allows states to make demands the other side would concede. Volumes of trade are important to facilitate conflict resolution, but also the information states can gather from their trading partners.