Assessing “God’s Diplomacy”: Military Spending and the Commercial Peace

1. Assessing “God’s Diplomacy”:Military Spending and the Commercial Peace Lucy GoodhartColumbia UniversityandAnastasia XeniasHunter College, City University of New York US Department of Commerce

2. Trade to end all wars • “Commerce [is] rapidly rendering war obsolete, by strengthening and multiplying the personal interests which are in natural opposition to it” • John Stuart Mill Principles of Political Economy 1848 • “Peace is the natural effect of trade. Two nations who traffic with each other become reciprocally dependent; for if one has an interest in buying, the other has an interest in selling: and thus their union is founded on their mutual necessities..” • Charles de Montesquieu, The Spirit of the Laws, Book XX • The interdependence argument was developed by 19th century British liberals such as Cobden and Bright. As Cobden put it, "Free Trade is God's diplomacy and there is no other certain way of uniting people in bonds of peace." • Trade may not always be fully effective in preventing war (contra Norman Angell, 1910, The Great Illusion) but does it help reduce hostility?

3. Commercial Peace • The mechanisms through which trade could reduce conflict include: • Economic interests • trading states avoid war because they want to avoid costs if trade is disrupted. This mechanism is more effective when trade is “free trade” because of the societal groups it empowers (James & Lake, 1989, Milner, 1988, McDonald, 2004, Gartzke, 2005). • Information • the ability that trading states have to signal resolve mitigates conflict (Sandoval-Bustos, 2006). • international institutions • Membership in trade groups reinforces both mechanisms above (Bearce, 2003). • Others have disputed the validity of the commercial peace as a "liberal illusion" (Barbieri & Levy, 1999; Barbieri, 2002).

4. Our Argument • If trade reduces the motivation for war and the likelihood of conflict then trade will also reduce military spending. • Military spending allows for a broader analysis. • Military spending may be a less “noisy” signal of preferences for conflict and perceptions of war likelihood than actual conflict (Gartzke, 1999). • Conflict may be a random event affecting few states at any one time, but military spending is constant and affects every state at all time. • There is much more variation in military spending over time and across countries than conflict. • Thus, we use data on military spending to test the predictions of the commercial peace hypothesis. • These tests can advance the existing literature on the commercial peace, all of which employs data on conflict. • Finally, we clarify how the operation of the commercial peace is related to context and how this affects our hypotheses.

5. Conditional Operation of the Commercial Peace • The effect of commercial peace will likely be stronger in the post-Cold War era for two reasons • Global threat declines: Elimination of the threat of superpower conflict (1991); military spending and conflicts are no longer determined by hierarchical relationships with the great powers. • Global trade rises: globalization takes-off with creation of WTO (1993), particularly for developing countries (ex. Asian Tigers, emerging markets). • The effect of the commercial peace may be weaker for countries that are reliant on trade in natural resources, due to the “resource curse” (Garfinkel et al, 2008). • The effect of the commercial peace should be distinctive for democracies and autocracies. Two possibilities guide our reasoning: • The liberal peace at its core, is a statement on the peacefulness of citizens. When citizens guide security policy there should be less war and more trade, less need to arm for war, and stronger prospects for a commercial peace. • On the other hand, the effect of the commercial peace could be stronger for states with less ability to make credible commitments and a weaker role for citizens eg: authoritarian states. • Thus, we look at variation in the relationship between trade and military spending for different eras, and across regime, allowing for different types of trade.

6. Globalization and military spending

7. Our Model Data Error Correction Mechanism We look at annual data for a panel of approximately 100 countries for the period 1960-2001 with a comparison of pre- and post-1989 sub-samples. We estimate the relationship between military spending, trade openness and other controls using an Error Correction Model. This model is appropriate when the dependent variable in levels (military spending) is non-stationary and allows us to look at short-run and long-run effects on spending. We estimate the model below and present results on long-run multipliers. • Real military spending • COW deflated by GDP deflators from WDI. • A measure of openness • ratio of exports plus imports/GDP (PWT) • Controls for capability and balance • Real GDP (WDI) • total population (COW) • average regional military spending (COW) • US military aid (WMEAT). • Security concerns • Involvement in any conflict with 25 battle deaths or more (UNDCP/PRIO). • Natural resource curse • Commodity exports as a percentage of all exports (WDI).

8. Table One: The Commercial Peace – Comparison of Openness and Democracy

9. Table Two: Post Cold War/Globalization era

10. Table Three: Peace and Natural Resources

11. Results • Openness to trade has no significant effect on military spending for the 1960-89 era and a significant and positive effect from 1990 on. • The coefficient on trade openness is larger for non-democracies than democracies in the post-Cold War era but cannot be estimated precisely for either set of countries. • Natural resource dependence is not significant for either democracies or non-democracies (in either period). The natural resource curse is associated with domestic conflict and higher military spending but does not impede the workings of the commercial peace. • From the perspective of military spending, trade openness is a stronger factor in promoting global peace than democracy in the contemporary era.

12. Normative Significance • First, trade expansion requires no change in political regime, avoiding the difficult questions of Western cultural imperialism. • Second, trade expansion is far more immediate than change of political regime promising faster results. • Third, trade expansion addresses the economic imperatives of developing countries, often with non-democratic government or weak democracies. • Fourth, a global institution with near universal membership, the World Trade Organization, already exists to foster trade expansion.