defense pacts and international trade

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Defense Pacts and International Trade Author(s): Andrew G. Long Source: Journal of Peace Research, Vol. 40, No. 5 (Sep., 2003), pp. 537-552Published by: Sage Publications, Ltd.Stable URL: http://www.jstor.org/stable/3648360Accessed: 21-08-2014 09:04 UTC

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R F1'1 SEARCHI -

© 2003 Journal of Peace Research, vol. 40, no. 5, 2003, pp. 537-552

Sage Publications (London, Thousand Oaks, CA and New Delhi) www.sagepublications. com

[0022-3433(200309)40:5; 537-552; 035591]

Defense Pacts and International Trade*

ANDREW G. LONG

Department of Political Science, Florida State University

Theories of international political influences on trade maintain that shared alliance commitments affect bilateral commercial exchange. The most prominent of these suggests that trade produces a security externality threatening states, but that a military alliance alleviates these concerns, leading to greater trade among allies. Yet past empirical analyses produce inconsistent findings with respect to the effect of military alliances on bilateral trade levels. This article presents a new argument to explain the inconclusive findings in previous studies. The potential increase in military power from efficiency gains through trade is a positive security externality only when a commitment to defend one's alliance partner exists. In essence, cooperative security agreements that require states to give military assistance to each other if attacked (i.e. defense pacts) will lead to greater trade among their members than agreements in which the members promise neutrality, non-aggression, or consultation. The analysis distinguishes alliances that include commitments of defense from those that do not, and uses two different sources of alliance data to examine the effects of defense pacts on trade levels between major powers from 1885 to 1990. The results demonstrate that defense pacts are associated with higher trade among alliance members, but that trade between members of non-defense pacts is statistically indistinguishable from trade between non-allies. This article recognizes that a link between economic and security issues exists and emphasizes their mutual relationship.

Introduction

Are military security alliances important factors in the decisions of governments to raise or lower tariffs, institute non-tariff barriers, etc.? Do private actors consider the

political-military ties of their home country when they establish trading relationships with foreign counterparts? While hypotheses developed in the literature on this subject are

compelling, they have not been supported consistently by empirical analyses. Statistical models demonstrate that partners in a

military alliance have higher, lower, or

* The author thanks Ashley Leeds, Will Moore, Sara Mitchell, Dale Smith, Stephen Shellman, Michaela Mattes, and three anonymous reviewers for helpful comments. Data for replication can be downloaded at http://www. ruf.rice.edu/-leeds/atop.html and correspondence can be directed to [email protected].

similar trade levels than non-allied countries (Gowa & Mansfield, 1993; Gowa, 1994; Mansfield & Bronson, 1997; Morrow, Siverson & Tabares, 1998, 1999; Mansfield, Milner & Rosendorff, 2000). In short, a review of the evidence for the effect (if any) of alliances on the extent of commercial

exchange between states presents one with an

empirical puzzle. I suggest that the mixed findings about

the relationship between alliances and trade are due, in part, to a gap between con-

ceptualization and operationalization. The

difficulty lies in the selection of an indicator for military alliance that does not match the

concept employed in the theory. Scholars

writing on this topic build their theories on a concept of military alliance that considers the partners to a treaty obligated to defend

537

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538 journal of PEACE RESEARCH

one another. An 'ally' functions as a military partner in the event of war in the logic of the argument. Yet, when designing empirical analyses, researchers include a much broader range of security agreements in the category of military alliance than necessary to capture the concept in their argument. I question the choice in previous research designs to operationalize alliance as any of three types of formal agreements (defense pact, neutrality/non-aggression pact, or entente) when the argument rests on the commitment of states to aid one another in the event of war. The type of obligation undertaken by the members of the treaty is important; alliances that contain pledges of military assistance in the event of attack, defense pacts, should lead to greater trade among allies. Choosing an indicator that corresponds to its concept allows me to shed some light on the empirical puzzle surrounding the relationship between alliances and international trade.

Within two different alliance datasets, I distinguish alliances that include commitments of military assistance in the event of attack (defense pacts) from those that do not (non-defense pacts) and examine trade levels between major powers from 1885 to 1990 to test the hypothesis that defense pacts affect international trade. The evidence is com- mensurate with my argument: defense pacts are associated with higher trade among alliance members, but trade between members of non-defense pacts is statistically indistinguishable from trade between non- allies. This relationship between defensive allies and international trade is not contingent upon polarity in the international system, as previous arguments contend, and holds when using data from the Correlates of War (COW) or Alliance Treaty Obligations and Provisions (ATOP) collections.

The findings in this study support the 'realist' theory of security externalities (Gowa, 1994) and substantiate arguments

suggesting that power and security may affect international trade (e.g. Krasner, 1976). However, the argument also lends credibility to 'institutionalist' approaches advocating that scholars pay more attention to how states design their relationships with one another and the international agreements between them (e.g. Downs, Rocke & Barsoom, 1996; Fearon, 1998; Lake, 1999). Moreover, this article provides further evidence that economic issues and security issues are related, which suggests that ana- lyzing their connection is important. While proponents of the liberal peace hypothesis suggest that trade deters conflict between states (e.g. Polachek, 1980; Russett & Oneal, 2001), this study finds that security cooperation influences bilateral trade as well.

The article begins by discussing the alliance-trade relationship. I examine some common definitions of alliance to illustrate the need for careful matching of definition, concept, and statistical indicator, and review three arguments for why one should or should not expect a relationship between alliances and trade. Next, I report on some mixed empirical evidence regarding alliances and international trade. In the third section, I argue that previous statistical analyses of the relationship between alliances and trade produce inconclusive results because scholars have tested their theories with an insufficiently discriminatory operationalization of alliance. Equipped with this new insight, the fourth section describes the research design necessary to evaluate the effect of defense pacts on trade. I construct a statistical model to estimate international trade levels and test my hypothesis on major power trade from 1885 to 1990. The initial analysis supports my expectations, and a subsequent test with an alternative sample of alliance data produces a similar result. I conclude with some remarks on the implications of these findings and suggestions for further study.

volume 40 / number 5 / september 2003



Andrew G. Long DEFENSE PACTS AND INTERNATIONAL TRADE

The Alliance-Trade Relationship

What Is an Alliance? It is useful at this point to discuss some common conceptions of what types of agreements between states constitute alliances. Multiple definitions of alliance exist in international relations literature, but with a minimal amount of variation on the common theme of cooperation between states in security or military affairs. For example, Holsti, Hopmann & Sullivan (1973: 4) broadly define an alliance as 'a formal agreement between two or more nations to collaborate on national security issues'. A narrower definition restricts the scope of an alliance between states to 'the conditions under which they will or will not employ military force' (Russett, 1971: 263). While these definitions require that the agreement between the states be formal, others include informal alignments in their definition as well (Walt, 1987).1 For the purposes of this study, I consider an alliance to be 'a written agreement, signed by official representatives of at least two independent states, that includes promises to aid a partner in the event of military conflict, remain neutral in the event of conflict, refrain from military conflict with one another, or consult/cooperate in the event of international crises that create a potential for military conflict' (Leeds et al., 2002: 238).

Not every military agreement entered into by a pair of states qualifies as an alliance, but multiple types of security agreements do meet this definition. In other words, the definition above is broad enough for the promises made by the parties to vary con- siderably. For example, in some military security agreements, states pledge to consult when a threat arises, and in others they promise to defend each other with military

1 See Snyder (1997) for an excellent treatment of alignments versus alliances.

force if attacked. Conceptually, military alliances can be a means to different ends, whether intended to increase security, deter an enemy, or exercise control over the ally (Morrow, 1991), and they require different commitments from their members.

Data-collection efforts intended to identify the agreements defined as military alliances between states recognize this variation in the obligations of the parties. Many researchers utilize the data collected by the Correlates of War (COW) project to identify alliance commitments between interstate- system members for statistical analysis. The COW alliance data has classified alliances between states according to 'the response required in certain specified contingencies' (Singer & Small, 1966: 5). The types of alliance, classified by the general obligation of the members, are:

I. Defense Pact: Intervene militarily on the side of any treaty partner that is attacked militarily.

II. Neutrality and Non-aggression Pact: Remain militarily neutral if any co- signatory is attacked.

III. Entente: Consult and/or cooperate in a crisis, including armed attack.

This typology of military alliances fits well with many of the definitions offered above, including the one adopted for this study. All three types of agreement can be considered collaboration or cooperation by two or more states in security/military affairs. It is important to note, however, that while each of the three types is a pledge of cooperation, each requires the states to adhere to a distinct obligation: come to a partner's aid, remain neutral, or consult in a crisis. As a result, one should be wary of adopting similar expectations for different types of agreements; all military alliances cannot be expected to have identical influences on state behavior.

In studies of the alliance-trade relationship, for example, researchers rely on the

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COW data to create their statistical indi- cators (e.g. Gowa & Mansfield, 1993; Mans- field & Bronson, 1997; Morrow, Siverson & Tabares, 1999). Gowa (1994), for instance, adopts the definition of Holsti, Hopmann & Sullivan (1973) mentioned above and then identifies allied states with COW alliance data. However, I will argue below that the logic of theories that anticipate higher levels of trade among allies is not applicable to all types of alliances.

Why Some Alliances Increase Trade There are two reasons to expect some alliances to have a positive effect on bilateral trade. The first concerns the actions of national governments pursuing security in an anarchic international system. Scholars working within a realist perspective argue that government leaders discriminate in favor of allies and against adversaries when they formulate trade policy. Deriving their argument from an optimal tariff game, Gowa & Mansfield (1993; see also Gowa, 1994) contend that security externalities arise through trade, and influence governments to direct their foreign economic policies to favor allies instead of adversaries. Because the efficiency gains in real income from trade can be used to increase military capabilities (i.e. military power), states must be concerned about others using these gains from trade for such a purpose. Trade with an adversary enlarges the income of a potential or real enemy, and 'any increase in the real income of its adversaries decreases the security of a state' (Gowa, 1994: 38).

In contrast, the gains from trade with allies do not constitute a similar threat because any gain in real income devoted to military use by an alliance member augments the security of the entire alliance. In other words, trade among allies reinforces the political-military power of the alliance, but trade between adversarial countries presents a security threat. With the use of force a

constant threat in a system structured by anarchy, states must be aware of the military power of both allies and potential or real adversaries and will manipulate trade policy in order to facilitate trade with allies and restrict trade with adversaries.

Allies may also trade more for a second reason. In commercial exchanges with foreign counterparts, or in locations outside the home state, investments by a firm are often relation-specific, or unique to a single exchange relationship. Relation-specific assets 'cannot be redeployed without sacrifice of productive value' - and are subject to opportunism, or 'self-interest seeking with guile' (Williamson, 1985: 47-56). Thus, the threat of opportunistic behavior by a foreign government can hinder trade. However, foreign governments should be less likely to act opportunistically toward allies because doing so will reduce trade between the states and reduce the political-military power of the alliance. Trade is likely to be greater between allies rather than adversaries because 'alliances can help regulate opportunism by foreign governments' (Mansfield & Bronson, 1997: 95).

On the other hand, engaging in opportunism against the firms of one's adversary has fewer repercussions in the realm of military security. Firms that wish to maximize the expected profitability of their investments - by avoiding opportunism -

will invest in assets that service allies' markets. Ceteris paribus, states that are militarily allied will have greater trade because firms know allies are less likely to take advantage of one another by raising trade barriers.

As an alternative explanation for greater trade among allies, Morrow, Siverson & Tabares (1998) contend that the observed relationship between alliances and trade can be accounted for by their common link to democracy. The authors stress the tendency for democracies to form military alliances and align with each other during militarized





conflict (Leeds et al., 2002; Siverson & Emmons, 1991; Werner & Lemke, 1997). One should expect trade to be greater between countries with 'limited' forms of government that adhere to the rule of law. The risk to firms of unfair treatment by a foreign government is likely to be lower in countries with limited, democratic regimes (Dixon & Moon, 1993). Political systems with open polities and judicial systems are less likely to confiscate an agent's assets, treat the agent unfairly in a legal dispute, or enact protectionist measures that will hurt foreign interests. Firms should be encouraged to trade in states with democratic systems because 'the political risk of arbitrary treatment by the host government' is smaller (Morrow, Siverson & Tabares, 1998: 651). If democracies are more likely to ally with one another, empirical tests must control for democracy to avoid finding a spurious relationship between alliances and international trade.

Some Inconclusive Findings

Empirical analyses demonstrate that alliances have a positive impact on trade after World War II. In statistical analysis, Gowa & Mansfield (1993) identify a pair of states as allies if they are partners in any defense pact, neutrality or non-aggression pact, or entente in the COW alliance dataset.2 They test the security externalities argument among major powers from 1905 to 1985 and find an insignificant coefficient on their alliance variables for the multipolar era before WWI1, but a positive, significant effect of alliances on trade in the bipolar Cold War period. In a subsequent article, Mansfield & Bronson (1997) also show that alliances among all states, not just major powers, are associated

2 They also coded any major powers that fought on the same side of a war as allies, and the United States and Japan were considered allies from 1951 to 1985.

with higher trade between states in the post- WWII time period.

Morrow, Siverson & Tabares (1998) also test the hypothesis that alliances are associated with higher trade levels using a similar dichotomous variable that indicates states are allies when they are partners to any defense pact, neutrality pact, or entente. Their model of bilateral trade includes a control variable for the likelihood that jointly democratic states will trade more (Dixon & Moon, 1993; Bliss & Russett, 1998). The results of their analysis show a positive coefficient on their alliance variable after WWII and a negative coefficient on their alliance variable before WWII. They conclude that alliances are positively related to trade in bipolar systems, though the coefficient is not statistically significant, and negatively related to trade in multipolar systems.3

To account for the apparent disparity in the alliance-trade relationship over time, some scholars suggest that changes in systemic polarity affect alliance cohesiveness. States have a greater number of options in a multipolar system than in a bipolar system, and the availability of these options will force states to be more wary of trade with allies when the system is multipolar. Allies will trade less in multipolar systems, then, because 'the threat that a member will exit or abandon an existing alliance to join an alternative one' is high (Gowa, 1994: 52). However, systemic polarity is an unsatisfying explanation for variance in the observed relationship between alliances and international trade. Alliance cohesiveness does not predict less trade between allies than adversaries; yet a negative relationship during periods of multipolarity is found consistently. One could also hypothesize that

3 A more recent study by Mansfield, Milner & Rosendorff (2000) controls for democratic regime type and finds alliances positively related to trade after WWII when inter- acted with the presence of a preferential trading arrange- ment between the states.

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trade between multipolar alliance partners will be higher than trade between adversaries, but not as high as trade levels between allies in bipolar systems.

In sum, empirical evidence for a relationship between alliances and trade is inconsistent; studies find positive, negative, and insignificant relationships depending on the time period of the study and the specification of the model. Given the persuasive arguments regarding security externalities and opportunism by foreign governments, an empirical puzzle exists. In the next section, I provide an alternative explanation that may help to resolve this puzzle.

Re-evaluating Military Alliances and International Trade

Why might there be no clear picture of the relationship between alliances and international trade? The answer lies in a breach between the theoretical concept and the statistical indicator. Previous empirical tests utilize an indicator of military alliance that encompasses all types of military agreements, while the concept of alliance in the theory refers to a specific type of agreement, the defense pact described above.

In empirical tests of the security externalities argument, two states are allies if they are party to an alliance of any type coded by Singer & Small (1966). However, the concept of alliance utilized in the theory does not describe all three of the Singer-Small alliance types. For example, both Gowa & Mansfield (1993) and Mansfield & Bronson (1997) argue that alliances alleviate the security externality produced by trade. 'Trade among allies is likely to enhance the security of all the parties' and 'bolster the aggregate political-military power of the alliance' (Mansfield & Bronson, 1997: 94). Thus, any state party to an alliance 'increases its own security' through trade with allies because trade increases a state's real income

(Gowa, 1994: 38). For the logic of this argument to follow, alliances must include the promise to intervene militarily in the event of attack.

Certain alliances, namely those classified as defense pacts, obligate the members to provide military assistance to a partner in the event of an attack upon the partner's sover- eignty and/or territorial integrity. These particular alliances commit states to defend each other, letting them count on their partners' military capabilities as well as their own.4 Therefore, trade is a positive externality among defense pact members because only defense pacts obligate states to use their forces to aid one another in hostilities. The security externalities argument tells us that governments are likely to reduce barriers to trade with allies, but they will only reduce trade restrictions for states with which they share defensive alliance commitments.

The same insight regarding defense pacts arises when one adopts the perspective of the firm that Mansfield & Bronson (1997) employ. Foreign governments should be less inclined to expropriate the assets of an ally's firm, or enact trade barriers against an ally. Opportunistic behavior against an ally's firms would reduce the military power of the entire coalition, but only when the states commit to defend one another in the first place.

Furthermore, defense pacts provide information to firms seeking to establish commercial exchange relationships that are less likely to be hindered by conflict in the future; firms realize that a state with allies promising to defend it is less likely to be

4 In order for states to consider gains in military capabilities by partners as their own, they should perceive the alliance is reliable. Leeds, Long & Mitchell (2000) report that 72% of alliances where members pledge active military support are reliable when war occurs, and 74.5% of all alliance commitments are reliable. Moreover, if leaders did not think an alliance obligation such as defense was likely to be upheld, it is unlikely that such an agreement would be formed (Leeds, Long & Mitchell, 2000).





attacked. If defense pacts deter attack by a challenger, firms should use this information in making decisions to establish trade. In the event the ally is attacked, a firm's own government is obligated by the alliance treaty to protect the trading relationships of its firms.

To elaborate, assume states A and B are members of a defense pact. State A gets involved in militarized confrontation with a third party, C, and a firm from State B has made investments facilitating trade to/from state As territory, or with one of As firms. A defense pact obligates the government of B to aid the government of A, protecting its firm's investments in trade with A.5 The assurance of protection by one's own government should encourage trade between states, suggesting higher trade levels between pairs of states (dyads) that have defense pacts.

Hence, defense pacts should be associated with higher levels of trade between the member states:

Hypothesis: Pairs of states that promise to provide one another with active military assistance in the event of attack by a third party will have higher levels of trade, ceteris paribus, than dyads without defense pacts.

The emphasis on alliances containing obligations of defense would be misplaced if

5 Investments in trade should not be confused with Foreign Direct Investment (FDI). While FDI may be used to facilitate trade, domestic investment is also relation-specific when it is designed to expand production for export to a foreign market. If trade were shut off between the two states, the firm would suffer a loss on the domestic investment to the degree that the assets are relation-specific, or cannot be converted to an alternative use without cost (Yarbrough & Yarbrough, 1992). The loss could equal the entire investment if the good or service cannot be exported to an alternative market. For example, automobile pro- ducers in Japan would suffer severe losses on cars built to meet US safety and emission standards if that market were closed.

every alliance treaty obligated the partners to come to each other's aid when attacked by a third party. But within COW alliance data specific to this study, in only 62% of the cases where a pair of major power states is allied in a given year have they signed a defense pact, or category I, alliance treaty. Further, only 49% of alliances include obligations by the states to defend one another in the Alliance Treaty Obligations and Pro- visions (ATOP) dataset from 1815 to 1944 (Leeds et al., 2002). Thus, around half of alliance treaties in the ATOP dataset do not entail a promise to defend an ally, and should not be considered as such.

States cannot rely on their allies to defend them when the treaties they sign only stipu- late neutrality or consultation in the event of a crisis or military confrontation.6 Conse- quently, the effect of non-defense pacts on trade between states may be wholly different from that of defense pacts, and researchers interested in testing arguments such as those sketched above should carefully separate defense pacts from non-defense pacts. An operationalization of alliance that fails to differentiate defense pacts and non-defense pacts could distort the effect of alliances on trade in empirical evaluation. One possible consequence is that the estimated coefficient for the alliance variable may be inconsistent in studies that use different samples. When military assistance is not promised, there is no reason to believe that the same behavior regarding trade policy and investment decisions by trading firms will hold.

Further, developing hypotheses about the effects of other types of alliance commitments besides defense pacts is certainly con- ceivable. Such an exercise is beyond the scope of this study. If the theories articulated by previous authors about defense pacts prove

6 For example, Leeds, Long & Mitchell (2000) report only 2 out of 82 instances from 1815 to 1944 in which states fulfilled their alliance commitment beyond the obligations called for in the treaty.

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to be supported empirically, then it will be a

worthy endeavor to expand upon those theories to consider the effects of non- defense pacts, but for now I restrict attention to testing the hypothesis that defense-pact members trade more than non-defense-pact members or non-allied states.

Research Design, Model, and Estimation

In this study, the unit of analysis is the dyad- year in a cross-sectional time-series design of the major powers from 1885 to 1990.7 The countries in the sample are the United States, Great Britain, France, Germany, Italy, Austria-Hungary, Japan, Russia/Soviet Union, and China. Two factors dictate the

spatial and temporal domain of the study. First, the choice of major powers is driven by a desire to be as consistent as possible with

previous work examining the effect of alliances on international trade (Gowa & Mansfield, 1993; Morrow, Siverson & Tabares, 1998, 1999). Data restrictions limit the temporal domain of the study. The

dependent variable is the annual level of real trade within a dyad.

While this study focuses on the effect of defense pacts on trade, other economic and

political factors influence bilateral trade levels as well. Thus, I begin by specifying a gravity equation of international trade between a pair of states (Anderson, 1979; Bergstrand, 1985, 1989). Its properties can be derived from any of the standard trade theories (Deardorff, 1998). The gravity model is so named because it produces a baseline model of aggregate trade flows between countries from the size of the countries' national incomes and populations and the level of resistance between them. To reflect transportation costs, scholars

7 I followed the COW designations of major power status exclusively (Small & Singer, 1982). The years 1914-19 and 1939-49 are excluded, owing to missing or unreliable trade and GDP data.

often include the geographic distance between states in the resistance term of the

equation. In accordance with the predictions of the gravity model, the distance between countries and population size should both be

inversely related to trade, while greater national income should increase trade. To this model, I will introduce other political variables of interest.

To test the hypothesis that defense pacts should be associated with greater trade in a

dyad, I estimate the following statistical model. The model is specified in multiplica- tive form, but actual estimation is performed after taking the natural log of the equation:8

DT.t = a(GB) (DEFt_ 4) (NDEFt_, 5) (SIMP6) (MID,t_l7) (JDEMP8)

where

D Tit is dyadic trade (the sum of i's imports from j and j's imports from i) in year t

G is the set of variables for the gravity part of the equation in year t and pj is the set of coefficients for these variables

DEFt_1 and NDEFt_1 are dichotomous variables for defense pacts and non-defense

pacts, respectively, in year t-l JDEM is a dichotomous variable for joint

democracy in year t SIM is the weighted similarity score, S, for

the dyad in year t

MIDt_1 is the presence of a militarized interstate dispute (MID) between the states in

year t-l a is a constant term and £ is a lognormally

distributed error term.

The variables for the gravity (G) part of the model are the product of the gross domestic

products (GDPs) of the states in each dyad, the product of the populations of the states

8 Dichotomous variables are coded either one or zero. The values of the dummy variables in the antilogarithmic form of the equation are then e and 1, respectively.





in each dyad, and the distance between the pair of states.9

To the basic gravity model, I add variables measuring two types of alliance obligation between states, as well as other political variables that are likely to affect bilateral trade. The COW coding scheme allows me to create two dichotomous variables representing alliance obligations between major powers (Singer & Small, 1966; Small & Singer, 1969). The first is coded one in a given observation only when the alliance commitment between the states in a year is a level I commitment, a defense pact, and zero otherwise. The second is coded one in a dyad-year when the members of the dyad have either a level II (neutrality/non-aggression) or level III (entente) alliance commitment, and zero otherwise. This allows me to differentiate among three groups of dyads: (1) those that have defense-pact alliances, (2) those that have non-defense-pact alliances, and (3) those that are not allied. These variables are mutually exclusive and should distinguish the influence of defense pacts on dyadic trade versus other non-defensive alliance commitments; non-allied dyads remain the reference category. Although other empirical studies demonstrate that there is very little concern for simultaneity bias in models of the relationship between alliances and trade (Morrow, Siverson & Tabares, 1998;

9 The author thanks John Oneal for sharing trade and Gross Domestic Product (GDP) data. Trade and GDP are measured in constant (1982-84) US dollars. Missing GDP data are predicted for 36 observations following the instructions of Russett & Oneal (2001). I include the GDP and population figures in the model as the product of the two countries' individual GDP and population values, in accordance with theories of international trade based on models of imperfect competition (Eichengreen & Irwin, 1995). Population data is from the COW capabilities index

(Singer, Bremer & Stuckey, 1972). Distance is the 'great circle' distance between the capitals of the states, unless the states are contiguous, in which case they are assigned a distance of one mile (Fitzpatrick & Modlin, 1986). The population, distance, foreign policy similarity, democracy, and COW alliance data were acquired using the EUGene program (Bennett & Stam, 2000). Data on militarized conflict is from Maoz (1999).

Mansfield & Bronson, 1997, see also Lai & Reiter, 2000), as a precaution I lag the defense pact and non-defense-pact variables.10

One must control for other political influences on trade as well. First, similar regime types among states may also affect their trade (Bliss & Russett, 1998; Dixon & Moon, 1993). As mentioned above, Morrow, Siverson & Tabares (1998) warn us that because democracies are more likely to ally with one another, a test of the effects of alliances on trade should control for domestic regime type. I include a dichotomous variable for joint democracy created from the Polity III data to avoid finding a spurious correlation between alliances and international trade (Jaggers & Gurr, 1995). The joint democracy variable is coded one when both states have scores greater than or equal to six in the current year on the Polity III institutionalized democracy scale.

Second, war between states is likely to disrupt trade between them. Not only is war likely to destroy production and transportation networks, but states may also imple- ment restrictions on the enemy as part of war strategy (Anderton & Carter, 2001).11 However, Pollins (1989a,b) demonstrates that conflict short of war can also reduce trade; therefore, it is useful to include a measure of military conflict that captures militarized disputes short of war. I do so by utilizing the COW Militarized Interstate Disputes dataset (Jones, Bremer & Singer, 1996). The variable MID is coded one when any militarized interstate dispute (ongoing and originating) occurs between the pair of states in the previous year, zero otherwise.12

10 Results for the analysis when these variables are coded for defense pact or non-defense pact in the current year do not significantly differ from those shown. ll This view is not universal; see Barbieri & Levy (1999, 2001). 12 The MID variable is lagged one year to minimize endo- geneity bias in estimation. A number of scholars report empirical evidence that trade reduces conflict (e.g. Russett & Oneal, 2001).

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In addition, Morrow, Siverson & Tabares (1998) argue that trade will be reduced by the potential for conflict between two states. They suggest that states with common foreign policy interests have a lower potential for military conflict and operationalize two states' common interests with the taub measure of their alliance portfolios. But Sig- norino & Ritter (1999: 131) show that taub can be an inaccurate measure of the similarity of states' foreign policy interests because the 'concordant rank orderings of alliance partners do not necessarily imply similar types of alliance commitments to each of the partners'. They develop a spatial measure of foreign policy similarity, S, that I use in this model to represent common interests. S ranges from negative one for completely dissimilar interests to positive one for perfectly similar interests. Because the natural log of any value less than or equal to zero is undefined, the similarity (SIM) scores are re-scaled to range from 1 to 3. The advantage of using S to measure similar foreign policy interests is the ability to specify the alliance commitments one considers relevant (regional or global) and to weight commitments by the military capabilities of the alliance partner(s). This is a study of major powers, so we should control for common interests beyond a state's region. Thus, I choose to include the global, weighted S-score for the dyad to adequately control for common interests.

Estimating cross-sectional time-series data requires special consideration because data measured over time and across different units can make estimates of the standard errors in Ordinary Least Squares (OLS) regression unreliable. The error variances for each cross-section (dyad) may be hetero- skedastic and/or contemporaneously correlated, while the errors within cross-sections are likely to be correlated (autocorrelation) because data is measured over time. OLS estimates will be consistent but inefficient

from violating the 'panel error' assumptions, which inhibits a researcher's ability to draw appropriate inferences from the analysis. One strategy for coping with these potential problems involves estimating a fixed effects model to account for unobserved differences between each dyad (i.e. unit heterogeneity) (Green, Kim & Yoon, 2001). However, some explanatory factors in the model, for instance

joint democracy, vary little over time in my sample, and a fixed effects model essentially includes dummy variables for each dyad. If explanatory variables do not exhibit con- siderable variation, the completely atheoret- ical dyadic dummies are likely to 'soak up' variation in trade that can be accounted for by variables with theoretical importance (Beck & Katz, 2001). In addition, to account for dynamics within the data, the fixed effects model would need to include a lagged dependent variable, and the inclusion of such a variable can bias coefficient estimates when other explanatory variables (e.g. GDP, population) exhibit strong serial correlation (Achen, 2000). Therefore, I estimate the model using Generalized Least Squares (Prais-winsten) regression, but adjust the standard errors for panel heteroskedasticity, contemporaneous correlation, and a first order autoregressive (arl) process. The results presented are consistent coefficients and efficient panel-corrected standard errors (PCSEs) (Beck & Katz, 1995).13

Results

The coefficient estimates for the model are reported in the first column of Table I. According to the hypothesis developed above, I expect dyads in which the states are allied by defense pact to exhibit higher levels

13 All models were estimated using the STATA 7.0 statistical program with the xtpcse command with options corr(arl) and pairwise. The xtpcse command accounts for gaps in the sample due to missing data by restarting the calculation of the rho coefficient after each missing observation.





Table I. Correlates of War (COW) Defense Pacts and Dyadic Trade: Major Powers, 1885-1990

Defense pact Alliance

Dyadic GDP

Dyadic population Distance COW defense pactr_ COW non-defense pactr_ COW alliance, l Joint democracy Similarity MID_ i Constant

Wald chi2

p > chi2

.902 -1.63

-.093 .335 .059

.458 -.499 -.016

22.3

N

(.083)** (.328)**

(.051)* (.191)*

(.094)

(.157)** (.767) (.133)

(6.00)**

555.6 .000 .32

1281

.919 (.084)** -1.65 (.334)**

-.095 (.051)

.109 (.097)

.478 (.160)** -.270 (.660) -.013 (.132)

22.1 (6.04)**

542.76 .000 .32

1281

Estimates are unstandardized GLS (Prais-winsten) regression coefficients with panel corrected standard errors (PCSEs). Standard errors for one-tailed tests are listed in parentheses. ** p < .01; * p < .05

of trade. The results support this hypothesis. The coefficient on the variable measuring whether the states are partners in a COW level I alliance (defense pact) is positive and statistically significant at the conventional .05 level. States that are members of defense pacts have, on average, a level of trade that is 37% higher than the level of trade between unallied states.14 Defense pact members also appear to trade at higher levels than states that have an alliance commitment described in this study as a non-defense pact. The coefficient on the non-defense-pact variable, although positive, is statistically insignificant. A test of the difference between these two

14 Calculating the substantive effect of a dichotomous variable on a dependent variable in logarithmic form is done in STATA 7.0 with the logdummy command. The effect can be closely approximated by 100 X (ecfflcient- 1) and interpreted as the percentage change in the dependent variable associated with a change in the dummy variable from zero to one (Giles, 1982; Kennedy, 1998). Similarly, the substantive effect of the independent variables that are continuous is calculated by multiplying the coefficient by 100 and is interpreted as the percentage change in the dependent variable associated with a one percent change in the independent variable. For example, a one percent change in dyadic GDP is associated with 90% change in dyadic trade, on average. In Table I, the substantive effect of defense pacts is about half that of dyadic GDP.

coefficients produces a chi-square value of 2.59, which is significant at the .10 level.

To check the robustness of the support for my hypothesis, I also estimated a model that included a dichotomous variable, labeled

COWAlliancer l, which is coded one for any alliance agreement, level I, II or III, between the states in the previous year, and zero otherwise. Results of estimation for the model that included this variable and not the defense-pact or non-defense-pact variables are shown in the second column of Table I. The coefficient for the variable measuring any type of alliance (defense pact; neutrality/non-aggression pact; or entente) between the states is insignificant.

With regard to the control variables in the model, the variables representing the gravity equation predict trade according to expectations. A greater distance between two states and a larger dyadic population reduces trade between states as indicated by the negative coefficients on these variables. The coefficient for dyadic GDP is also in the expected direction: the coefficient is positive and significant. In line with previous empirical studies of trade (Bliss & Russett, 1998; Dixon & Moon,

547




1993; Morrow, Siverson & Tabares, 1999; Mansfield, Milner & Rosendorff, 2000), the coefficient for joint democracy is positive and significant in both models presented in Table I. The similarity of interests variable, S, is insignificant in both models, which fails to support the claim that states with common interests engage in more trade. The presence of a militarized interstate dispute between two states also has no discernible influence on dyadic trade in the following year.15

There exists an additional source of alliance data with which to test the hypothesis about defensive alliance commitments developed above. The Alliance Treaty Obli- gations and Provisions (ATOP) dataset has some advantages over the COW alliance data, but is limited by the shorter temporal domain (1815-1944) that it covers. The ATOP data is not a simple subset of the COW alliance data; there is variance in the case lists. While the two datasets employ similar definitions of a military alliance, the ATOP dataset identifies 81 alliances that are not part of the COW alliance list, and excludes 15 alliances in the COW list over the 1815-1944 time period (Leeds et al., 2002).

To test my hypothesis, I create two dichotomous variables from the ATOP data designed to distinguish alliances containing obligations of defense from those that offer no such commitment.16 The first variable is coded one for a dyad-year when the states share membership in an alliance that obligates them to aid one another in the event of attack by a third party, zero otherwise. In ATOP, multiple commitments can be included in the same alliance treaty between states; as long as the treaty includes a pledge of active defense, I consider the agreement a defense pact. The second dichotomous variable I construct is

15 The insignificant relationship between militarized conflict and trade is counter to the expectations of both 'realist' and 'liberal' paradigms. 16 Alliance data to construct these and subsequent variables are available at the ATOP project website: http://www.ruf. rice.edu/-leeds/atop.html.

coded one for a dyad when the states have any other alliance commitment, but not a defensive obligation, and zero otherwise. I insert these two variables into a statistical model of trade constructed exactly as before; the only difference in this model is the use of the ATOP alliance data to create the defense- pact and non-defense-pact variables and the shortened temporal domain.

The outcome of this second test is markedly similar to the analysis just dis- cussed. The coefficients on the ATOP defense-pact and non-defense-pact variables in the first column of Table II further support the evidence presented in the test using COW alliance data. Partners in ATOP defense pacts exhibit 22% greater trade levels than non-allied states. Non-defense pacts, again, are positive but insignificantly related to trade. Plus, a chi-square test of the difference between the coefficients is significant at the .05 level. Neither do the signs and significance levels of the coefficients for the control variables in the model change from the previous findings with COW alliance data. Joint democracy, dyadic GDP, dyadic population, and distance all remain statistically significant and in the expected direction; similarity and MID,_1 are insignificant.

Finally, I report the results from a fourth model, again to check the robustness of the results, in the second column of Table II. In this model, I substitute a variable coded one for any type of ATOP alliance commitment (defense, offense, neutrality, non-aggression or consultation) between two states in the previous year, and zero otherwise, for the defense-pact and non-defense-pact variables. The variable ATOP Alliance,_1 is insignificant, while the other control variables remain quite similar to the model differentiating between defensive and non-defensive alliance commitments.

The positive and statistically significant coefficients for the COW and ATOP defense-pact variables are remarkable when





Table II. Alliance Treaty Obligations and Provisions (ATOP) Defense Pacts and Dyadic Trade: Major Powers, 1885-1944

Defense pact

Dyadic GDP

Dyadic population Distance ATOP defense pactr_ ATOP non-defense pactr_ ATOP alliancer_l Joint democracy Similarity MIDr_l Constant

Wald chi2

p > chi2

.673 -.688 -.133 .200 .039

.463 -.407 -.045 7.10

N

Alliance

(.121)** (.210)**

(.020)** (.097)* (.071)

(.161)**

(.472) (.042)

(4.14)*

100.92 .000 .66 958

.673 -.696 -.131

.057

.461 -.361 -.045 7.26

(.121)** (.210)** (.020)**

(.069) (.162)**

(.470) (.042)

(4.15)*

95.53 .000 .66 958

Estimates are unstandardized GLS (Prais-winsten) regression coefficients with panel corrected standard errors (PCSEs). Standard errors for one-tailed tests are listed in parentheses. ** p < .01; * p < .05

one recalls that no previous study demonstrates a positive relationship between alliances and international trade before WWII. Yet the inferences I am able to draw here are not contingent on the time period of the analysis. I conduct three investigations into whether systemic polarity influences the relationship between alliances and trade, utilizing the COW alliance data, and find no significant pattern in the relationship between alliances (or defense pacts) and international trade based on the polarity of the system.17

To elaborate, I first code a variable one for years in which states were allied after 1945 (bipolar allies) and zero otherwise, and then code a variable one for years in which states were allied before 1945 (multipolar allies) and zero otherwise. Neither variable produced a significant coefficient when estimated in a model on the full sample that included the other gravity and political variables. Second, I estimate the model on bipolar and multipolar time periods separately. For the years after 1945, when

17 The limited temporal domain of the ATOP data at this time prevents one from investigating any polarity effects.

the system is considered bipolar by Gowa (1994), the COW defense pact variable was perfectly collinear with the joint democracy variable in the sample and was dropped from the model, which suggests that con- trolling for democracy is important in estimating the relationship between military alliances and trade, as Morrow, Siverson & Tabares (1998) recommend. In the multipolar era before WWII, the defense-pact variable was positive and significant and the non-defense-pact variable was insignificant. Finally, I code four dichotomous variables to distinguish between bipolar defense-pact allies, multipolar defense-pact allies, bipolar non-defense-pact allies, and multipolar non- defense-pact allies. When I estimate the model with these variables, both of the non-defense-pact variables are insignificant, and the multipolar defense-pact variable is positive and significant. The bipolar defense-pact variable is still highly correlated with the joint democracy variable (r = .64) and is negative and insignificant.18

18 These results are available from the author upon request.

549




Thus, the evidence in this study does not conform to Gowa's (1994) expectations regarding the effect of systemic polarity on the relationship between alliances and international trade. The inconsistent results from previous analyses may be attributable not to variations in the power configuration of the system, but to use of an indicator for alliances that did not correspond with the concept in the theory.

Conclusion

This study demonstrates that a breakdown between concept and statistical indicator may be responsible for the empirical puzzle about the influence of alliances on trade levels between major powers. In a statistical analysis of dyadic trade between major powers from 1885 to 1990, I find support for the hypothesis that defense pacts are positively related to dyadic trade levels, and that their non-defense-pact counterparts are not significantly related to trade in a dyad. While many scholars conduct inquiries into the link between trade and conflict, with a focus on the potential for trade to reduce the probability of interstate conflict, this article suggests that the link between economics and security also runs in the other direction. Military cooperation can influence commercial exchange. Extending the spatial/ temporal domain of this study to further investigate this linkage presents itself as a direction of future research.

Furthermore, a theory of how other alliance commitments might influence bilateral trade is necessary. Hypotheses about the effect of offensive, neutrality, non-aggression, and even consultation pledges should be developed. For example, within some types of alliances, trade could produce a negative security externality. Non-aggression pacts, for instance, are atypical of alliances in general. In these agreements, states pledge to refrain from the use of force in their relations. Why

would the leaders of states form such an agreement unless they desired assurance against future conflict? In other words, non-aggression pacts can signal imminent conflict between the states, or represent a foundation for future peace. Hypotheses about the relationship between trade and non-aggression pacts, along with other types of commitment, should be explored in more detail.

In addition, research designs that operationalize alliances with a single variable are overaggregating the many types of obligations that states agree to when forming military alliances. If the theories tested concern specific types of alliance commitments, researchers may be subjecting their hypotheses to more difficult tests than necessary and obfuscating important relationships. Scholars concerned with the effect of alliances on other types of economic interactions (capital flows, foreign direct investment, etc.), as well as cooperation and conflict in general, need to contemplate the implications of collapsing alliances into a single category of commitment for both their theories and their empirical tests.

Finally, studying the influence of foreign policies on the behavior of firms or states requires taking into account the specific obligations that states make in forming military agreements. To recommend a course of action most beneficial to policymakers, scholars of international relations need to develop an acute understanding of the implications of certain policy actions. This may sometimes require theories of the effects of specific alliance commitments by states, rather than theories that consider all alliances to have identical consequences.

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