Economic Interdependence and International Interactions: The Relationship Between Trade, Foreign Aid, and Tariff. By Yuan-Ching Chang

Transcription

1 Ecooc Iterdepedece ad Iteratoal Iteractos: The Relatoshp Betwee Trade, Foreg Ad, ad Tarff Ecooc Iterdepedece ad Iteratoal Iteractos: The Relatoshp Betwee Trade, Foreg Ad, ad Tarff By Yua-Chg Chag The trade-coflct odel claed that trade reduces coflct. Ths paper eteds the trade-coflct odel to corporate the foreg ad ad tarff effects. The theoretcal propostos supported by proofs are as follows: trade ad foreg ad reduce coflct ad tarff creases coflct. The eprcal tests show that trade reduces coflct betwee states ad the causalty fro trade to coflct reas. Foreg ad drectly decreases coflct. The argal effect of foreg ad reducg coflct s greater tha that of trade. However, the foreg ad s uch saller agtude tha trade ad trade s ore portat tha ad affectg teratoal relatoshps. I addto, the foreg ad effect s greater for o-tradg parters tha tradg parters. Foreg ad creases trade, ad thereby drectly decreases coflct sce trade reduces coflct. However, the drect effect of foreg ad decreasg coflct wll be saller tha the drect effect. Tarffs, f over a crtcal level, wll crease coflct. Yua-Chg Chag s a Assstat Professor of Ecoocs Departet, Chese Culture Uversty. He receved hs Ph.D. degree fro the State Uversty of New York at Bghato, USA. Publcato: a croecoocs tetbook. Curret research terests: ecooc terdepedece ad teratoal teractos, labor ecoocs. Eal: ycchag@faculty.pccu.edu.tw.

2 Takag Joural of Iteratoal Affars Key words: trade, foreg ad, tarff, teratoal teractos, coflct, cooperato JEL: D74, F3, P6. Itroducto The relatoshps betwee teratoal coflct ad other ssues, such as teratoal terdepedece ad poltcal sttutos, have receved creasg atteto. Over the past cetury, people have debated the vrtues ad vces of foreg trade. Does teratoal trade provde a way to terstate peace? Are states wth etesve ecooc lkages less lkely tha others to egage oe aother coflct? How would teratoal relatoshps be affected by other factors? Ths research wll preset the cocept that free trade produces welfare gas, hece coutry wll reduce coflct order to protect her trade gas. There are varous arguets for supportg free trade. May ecoosts beleve that free trade wll avod the effcecy losses assocated wth protecto. Such easured costs of devatg fro free trade are large. The other kd of addtoal ga volves coparatve advatage ad ecooes of scale. Also by provdg etrepreeurs wth a cetve to seek ew ways to eport or copete wth ports, free trade offers ore opportutes for learg ad ovato tha are provded by a syste of aaged trade, where the goveret largely dctates the patter of ports ad eports. Aother arguet for free trade s that a poltcal cotet to free trade s a good dea practce eve though there ay be better polces prcple. I realty ay goveret agecy atteptg to pursue a sophstcated progra of terveto trade would probably be captured by terest groups ad coverted to a devce for redstrbutg coe to poltcally fluetal sectors. As such, t s better to advocate free trade wthout ecepto. Free trade s so portat that t would affect the teratoal relatos. A lot of factors affectg teratoal

3 Ecooc Iterdepedece ad Iteratoal Iteractos: The Relatoshp Betwee Trade, Foreg Ad, ad Tarff 3 teractos are vestgated, such as trade (.e. terdepedece), cotguty, foreg ad, tarff, deocracy, coutry se, allace, thrd party, arket power, ecooc growth, ltary capablty rato, etceteras. Ths paper wll focus prarly o foreg ad ad tarff that are very uch related to trade essece. Ad s uch ore tha just a carefully adstered flow of resources. Doors have strategc, poltcal ad coercal otves for provdg ad, besdes ther supposedly oral cotet to the developet of the Thrd World. We ca label ad as offcal developet assstace, but ad reaches the developg coutres through prary two kds of chaels: blateral ad ultlateral. For blateral ad, dvdual door goverets are both the resources ad the chaels of assstace. Wth parlaetary sacto, goverets approprate ad ad detere ts apportoet ad use, egotato wth recpets. The essece of the ultlateral ad s the collectve ature of both the goverace ad the adstrato of ad. Doors ad recpets both have rghts how these resources are apportoed ad utled. By cotrast, the two advatages of ultlateral ad are ts uty to the poltcal ad coercal pressures that are brought to bear o blateral ad, ad ts greater respose to the developet eeds of recpets. Ths syste ecopasses the UN faly of orgaatos, the Iteratoal Developet Assocato ad the regoal developet baks. Tarffs are very atural for dyads. Most coutres pose tarffs oe aother. A coutry apples custos duty (tarff) o a ported product at the te of port. But the reducto of tarff barrers s the recet world tred. The lberalato of trade was acheved through teratoal egotato (.e., oe kd of teratoal teracto). That s, goverets agreed to egage utual tarff reducto. Iteratoally coordated tarff reducto as a trade polcy ca be For a detaled dscusso o foreg ad, see Browe (990).

4 4 Takag Joural of Iteratoal Affars dated back to the 930s. The tal trade probles betwee coutres were solved by blateral tarff egotatos. After the World War II, the ultlateral tarff reductos have take place uder the Geeral Agreeet o Tarffs ad Trade (GATT), establshed 947. There s o doubt that the operatos of the GATT had greatly cotrbuted to the epaso of world trade ad hece to the peace ad prosperty. The GATT s a ultlateral agreeet aog coutres provdg a fraework for the product of teratoal trade. It has bee stregtheed ad suppleeted fro te to te (e.g. Keedy Roud, Tokyo Roud, Uruguay Roud). The latest such effort was ade the Uruguay Roud of Multlateral Trade Negotatos o Jauary 995, whch had resulted the creato of the World Trade Orgaato. The worldwde tarff reductos o a odscratory bass pleeted wth GATT, ad soe groups of coutres have egotated preferetal tradg agreeet uder whch they lower tarffs wth respect to each other but ot the rest of the world. These ultlateral tarff plas clude preferetal tarff reductos o a dscratory bass (e.g., wth the syste of Coowealth Prefereces or aog a group of Europea coutres) ad preferetal tarff elato (e.g., a free trade area, a custos uo). The ebers a custos uo (e.g., Europea Uo) agree to set up coo eteral tarffs. The ebers a free trade area (e.g., North Aerca Free Trade Agreeet) do ot charge tarffs o each others products, but set ther ow tarff rates agast the outsde the world. The effect of preferetal tarff elato o atoal welfare s ukow, t ust deped o whether trade creato or trade dverso. 3 For eaple, 99 four South Aerca atos, For a detal, see Brusse (997), Rausser (995), Dder (999), Lloyd (999), Howse (998), ad Bagwell ad Stager (997a, 997b). 3 Ether kd of agreeet has abguous effects o ecooc welfare. The case of trade creato: f jog such a agreeet leads to replaceet of hgh-cost

5 Ecooc Iterdepedece ad Iteratoal Iteractos: The Relatoshp Betwee Trade, Foreg Ad, ad Tarff 5 Argeta, Bral, Paraguay, ad Uruguay, fored a free-trade area kow as Mercosur where wth four years the value of trade aog the atos trpled. But the World Bak s report 996 claed that the et effects o the ecooes volved were probably egatve due to trade dverso. Ths paper wll focus o the eolberalsts vews of that trade reduces coflct betwee coutres. Ths arguet ca be traced to Eerc Cruce, Fracos Qesay, Ada Sth, Davd Hue, Cobde, Joh Brght, Joh Stuart Mll, ad Baro de Motesqueu who dscuss slar thees. 4 The research presets a atheatcal trade-coflct odel to corporate foreg ad ad tarff effects. I partcular, we eae how the gas fro trade are affected by these factors. Foreg ad creasg gas fro trade reduces coflct, ad tarff decreasg gas fro trade creases coflct. The paper s structured as follows. Ths secto serves as a sple troducto. A bref lterature revew s provded Secto. Secto 3 presets the basc trade-coflct odel eteded to corporate foreg ad ad tarff effects. Secto 4 dscusses the varous data sources. Secto 5 provdes ethodology ad eprcal results ad Secto 6 cocludes.. Lterature Revew. Trade-Coflct Neolberalsts argue that trade reduces coflct betwee coutres. The ssue bega to receve reewed atteto whe Polachek (978, 980) odeled how trade ca ehace cooperato betwee doestc producto by ports fro other ebers of the agreeet, t wll produce coutry gas. The case of trade dverso: f jog such a agreeet leads to replaceet of low-cost ports fro outsde the oe wth hgher-cost goods fro ebers atos, t wll produce coutry loses. 4 For a detal, see Spegel (99) ad de Wlde (99).

6 6 Takag Joural of Iteratoal Affars coutres. 5 These papers preset a coget theoretcal odel wth rgorous eprcal tests of the coflct-trade relatoshp. If coflct leads to a cessato or at least a duto of trade (perhaps through tarffs or quotas), the coutres wth the greatest gas fro trade face the hghest costs of coflct ad hece egage the least coflct ad the ost cooperato. Sce trade gas are dffcult to easure, trade s ofte easured by trade levels stead of actual trade gas. A 30-coutry saple fro (Polachek 978, 980), a 5- coutry saple fro (Polachek 99), ad a te seres aalyss fro for So-Sovet / U.S. relatos (Gasorowsk ad Polachek 98) reveal a verse relatoshp betwee trade ad coflct. 6 Subsequet work looks at trade gas ad fds a eve stroger verse relatoshp betwee trade gas ad coflct (Polachek 99 ad Polachek ad McDoald 99). Whle these papers assue trade s the causal varable, the questo of whether trade causes coflct or coflct causes trade s debatable. Polls (989a, 989b) presets a odel ad eprcal tests where trade s edogeous ad coflct s a eogeous varable. He argues that trade s detered by poltcs ad that fredly coutres trade ore tha hostle coutres. Both odels are slar, yet t s portat to detere the drecto of causato. Several dfferet approaches are used to look at causato. Oeal, Oeal, Mao, ad Russett (996) ad Barber (996) use lagged trade data argug that trade the precedg year caot be caused by 5 The followg s a bref revew of the trade-coflct lterature. Detaled revews are provded Barber (996), Reuvey ad Kag (998), Barber ad Scheder (999) ad Masfeld ad Polls (00). 6 Studes that cocetrate o the trade-coflct relatoshp ad cla trade reduces coflct clude Blaey (988), Doke (988), Neff (990), Sayrs (990), Masfeld (994), Oeal et al. (996), Reuvey ad Kag (996), Russet et al. (998), Dorusse (999), Oeal ad Russett (999), Polachek (997), Polachek et al. (999), Hegre (000), Gartke et al. (00), Russett ad Oeal (00).

7 Ecooc Iterdepedece ad Iteratoal Iteractos: The Relatoshp Betwee Trade, Foreg Ad, ad Tarff 7 coflct the curret year. Polachek (980) ad Polachek ad McDoald (99) preset sultaeous equatos tests where both trade ad coflct are cosdered to be edogeous varables. These studes provde support for trade causg coflct, but fd lttle evdece that coflct reduces trade. Slar coclusos are draw usg Grager causalty tests of So-Sovet/U.S. relatos (Gasorowsk ad Polachek 98). Reuvey ad Kag (996) also use Grager causalty tests, cludg a wder varety of dyads ther aalyss. They fd evdece of trade ltg coflct ad coflct ltg trade. The trade-coflct lterature has bee eteded to eae other questos. For eaple, as s well kow, deocraces fght each other less tha o-deocraces. 7 Polachek (997) ad Oeal, Oeal, Mao, ad Russett (996) apply the trade-coflct relatoshp to uderstadg why. Polachek (997) docuets that deocraces trade ore tha o-deocraces ad oce ths s take to accout, deocratc dyads ehbt less coflct ad ore cooperato. Jaes, Solberg, ad Wolfso (999) eted ths aalyss by corporatg sultaeous equatos approaches. McLaughl-Mtchell ad Prs (999) groud terstate coflct betwee deocraces the post- World War II te perod. Polachek et al. (999) eployed the tradecoflct odel to aalye teratoal teractos. Ther bref results geerally support the developed hypotheses. However, ay eprcal questos are stll left uresolved. Dorusse (999) ad Morrow (997) preseted gae-theoretc approaches whch also costtute prosg research aveues. Shera (00) foud that deocraces were ore lkely to partcpate GATT dsputes (.e., 7 For eaple Ruel (983), Cha (984), Breer (993), Mao ad Abdelal (989), Mao ad Russett (993) are a few of the ay studes. Recetly, Russett ad Oeal (00) have foud evdece that three legs - deocracy, etesve ecooc terdepedece, ad shared ebershp supraatoal sttutos all reduce the probablty of atagos.

8 8 Takag Joural of Iteratoal Affars trade coflct) tha odeocratc states.. Foreg Ad There are ay substatal depedet studes addressg the role of foreg ad o teratoal relatos, especally blateral ad relatoshp. 8 May researches focus o the justfcatos for ad. These justfcatos are altrus, poltcal deology, coercal terests, ad ecooc developet. Whle lots of dsagreeets rea, people agree o the eleets of successful developet strateges. These clude: developet of arket sttutos; wellfuctog goveret sttutos; relace o arket echass; vestet to acheve crtcal levels of socal ad physcal frastructure; atag a stable acroecooc evroet; creased role of foreg trade; potetal role of foreg prvate vestet; ad trasfer of kowledge ad techology fro ad door coutres. 9 But realty, ay of the potetal ad recpets ca be charactered by ters such as patroal, ret-seekg, sesovereg, ad corrupt. Ths kd of state-falure s the greatest threat to the success of foreg ad. Those coutres that eed ad the ost are precsely those coutres where ad ay be the least effectve, ths case for poltcal rather tha ecooc reasos. 0 Soe researches develop theoretcal odel usg utlty approach 8 For eaple Orr (989), Gouder ad Se (999), McKlay ad Lttle (979). 9 For a ecooetrc te-seres aalyss of what otvates foreg ad, see Gouder ad Se (999) ad for a ecooetrc cross-secto aalyss, see McKlay ad Lttle (979), Maels ad Nssake (984), Gouder (994). For slar dscussos, also see Schraeder et al. (998). For a welfare aalyss, see Djajc et al. (999) ad Gupta (997). For the dea of captal flows see Lesk ad Whte (998). For polces ad growth, see Bursde ad Dollar (000). 0 For varable topcs, see Mosley (987), Rddell (987, 996), Krueger, Mchalopoulos ad Rutta (989), Browe (990), Whte ad Luttk (994), Obstfeld (995), ad Tarp (000).

9 Ecooc Iterdepedece ad Iteratoal Iteractos: The Relatoshp Betwee Trade, Foreg Ad, ad Tarff 9 to look at the pact of foreg ad. Dudley ad Motarquette (976) treated foreg ad as a prvate good, ad spect how blateral ads would the be suppled. Dudley (979) treated foreg ad as a publc good ad looked the pact of ad aog coutres. He claed that as a atoal publc good, resdets of the door coutres are aware of the effects of ther ad recpet coutres ad they ay be cocered that creased spedg by other coutres wll reduce the socal returs fro ther ow spedg. Foreg ad spedg sees to be a way for a coutry to ga poltcal recogto ad fluece aog other coutres. Ludborg (998) looked the foreg ad as a gft echage for teratoal support. The relatve poltcal support for a coutry s postvely affected by the coutry ad ad egatvely affected by the rval coutry ad..3 Tarff Much of the lterature focuses o the relatoshp betwee tarffs ad trade lberalato. For eaple, Bagwell ad Stager (997a) preseted a odel of custos uos, whch predcts that the early stages of the process of custos-uo forato wll lead to a teporary hoeyoo for lberal ultlateral trade polces whch ultately ust be reversed as the custos uo becoes fully pleeted. Bagwell ad Stager (997b) also focused o the cosequeces of the forato of regoal trade agreeets o the ablty to ata effectve ultlateral cooperato. However, the odel does suggest that these heghteed ultlateral tesos should be teporary, ad that greater ultlateral cooperato ca reeerge oce the ew tradg patters are ore frly establshed. Grossa ad Helpa (995), ad Levy (999) further troduced specalterest poltcs (.e., lobbyg) to the aalyss of teratoal trade relatos. Ther odels studed polcy forato cooperatve ad For dfferet dscussos, also see Kep (995).

10 0 Takag Joural of Iteratoal Affars ocooperatve teratoal tarff settgs. Pahre (998) provded evdece that suggests trade treates do play a portat role supportg a lberal tradg order. Stahl ad Turue-Red (995) eve developed gae-theoretc odels to aalye cosequeces of dverse poltcal partes the cotet of teratoal tarff polcy. Bod, Syropoulos ad Wters (00) utled the theory of repeated gaes, ad the derved codtos wll be cetve-copatble both for the uo ad outsde coutres. 3. The Model A world syste ecopasses uerous coutres, ay tradg wth each other because the vrtues of trade ake each coutry better off ecoocally. What results s a syste of ter-coutry terdepedeces, whch f based o free arket prcples cludg free trade ad the full oblty of resources, would result aal global output. Ay coutry breakg off such a trade relato would decrease ts ow log-ru ecooc well-beg, as well as perhaps the well-beg of ts tradg parters ad of other coutres (Aderto ad Carter, 00). As such, reegg o a trade relatoshp s costly fro a prvate as well as a global perspectve. 3. The Trade-Coflct Aalytcs To see how these potetal welfare losses lead to greater cooperato ad less coflct, ore structure eeds to be troduced. Frst, a actor coutry's socal welfare fucto s defed as W(C, Z). The varable C s total doestc cosupto, whch s defed as: For the theoretcal lteratures o the relatoshp betwee regoal trade agreeets ad the ultlateral tradg syste, see Kea ad Rea (990), Kruga (99), Bod ad Syropoulos (996a ad 996b), ad Bagwell ad Stager (997a ad 997b).

11 Ecooc Iterdepedece ad Iteratoal Iteractos: The Relatoshp Betwee Trade, Foreg Ad, ad Tarff = C=Q - = + () where Q s doestc producto of a represetatve coodty, the are the eports of a represetatve coodty to coutry, ad the are the ports of a represetatve coodty fro coutry. 3 By cludg C, as defed, our approach s cosstet wth the ecooc theory paradgs that descrbs how coutres ae ther collectve well-beg. The varable Z=(,,.., ) represets a ltared ad poltcal terstate coflct vector where each stads for coflct toward a partcular coutry. If s greater tha ero, ths ples that there s ore coflct tha cooperato, whle a that s less tha ero ples that there s ore cooperato tha coflct. Realst theores that ephase the portace of atoal securty otve clude the poltcal relatos varable Z (Keohae ad Nye, 989). Typcally: W =W c > 0 () C deotes creased welfare acheved through creased doestc cosupto. Slarly: W Z =W (3) defes welfare assocated wth coflct. W ca be postve f a actor gas satsfacto whe behavg a coflctual aer toward aother coutry. I the begg, coutres face a trade patter based o epected or estg teratoal relatos (.e., relatos based o coflct or cooperato). There are a varety of ethods through whch coflct 3 We ca have coodtes as Polachek (980) ad eve te t subscrpts.

12 Takag Joural of Iteratoal Affars ay fluece trade, cludg tarffs, quotas, ebargoes, or other trade prohbtos. For splcty, we vew coflct as akg trade ore costly by affectg port ad eport prces. That s, coflct s assued to affect the ters of trade. If a target coutry respods to a actor's coflct by decreasg the prce t wll pay for the actor's eports, the coflct (o the part of a actor) rases the costs of trade. Ths ples decreased trade ad a loss of the usual "gas fro trade". Slarly gas fro trade are lost f a coflctual actor has to pay hgher prces for ports fro a target recpet of ts coflct. Ths eas that the eport prce p ad the port prce p are a fucto of coflct such that p ( )<0, p ( )<0 ad p ( )>0, p ( )>0. 4 Thus, the plct prce of beg hostle s the duto of welfare assocated wth potetal trade losses. Uder ths trade-coflct relatoshp, the actor coutry wll choose a optal level of coflct toward the th target coutry ( ) so as to ae the socal welfare fucto wth postve but dshg argal utlty of cosupto ad argal utlty of coflct; such that W c >0, W cc <0, W >0, W <0, W j =W j. 5 For splcty we assue the socal welfare fucto s separable C ad Z (.e., W c =0), plyg that the cosupto of coflct ad the cosupto of other coodtes are depedet. Gve ths 4 These assuptos are fro the orgal trade-coflct odel whch claed that what s volved such soco-ecooc applcatos s broadly redefg prce so as to ecopass plct opportuty costs assocated wth cosupto (Polachek, 978, 980). 5 W >0 s the ate argal beeft of addtoal coflct toward aother coutry, the beeft (f t ests) of hatred. I teratoal relatos, t ght be argued that f atos feel forced to choose coflct as the least udesrable course of acto avalable to the, there should always be soe postve argal beeft attached to ths choce. Oe could further splfy by assug that there s o drect welfare ga fro coflct,.e., W =0. However, because we wll defe alles ters of cross-effects (W ), we allow for W to be a fucto of Z (Polachek et al. 999). For the possblty that W <0, see Polachek (978, 980).

13 Ecooc Iterdepedece ad Iteratoal Iteractos: The Relatoshp Betwee Trade, Foreg Ad, ad Tarff 3 structure, the actor s doestc welfare s as hgh as possble whe t chooses teratoal teracto Z to ae W(C, Z) subject to the balace of payets costrat, = p - = p = 0. That s, f oly cosderg the effect of pure trade gas o coflct, the actor faces the followg aato proble: = Ma L=W(Q+ - =, Z)+λ( = p - = p ) (4) FOC: W +λ( p ' - p ' )=0 (4a) W +λ( p ' - p ' )=0 (4b) : : : : W +λ( p ' - p ' )=0. (4) The FOCs sply state that at the arg a actor coutry chooses a aout of coflct wth coutry # so as to equate the coflct s argal costs ( p ' - p ' ) ad argal beefts (W /λ).6 I order to satsfy the secod order codtos for aato, the Hessa atr ust be egatve defte. I other words, the prcpal ors H, H, H 3,, H ust alterate sg: 6 We assue λ s costat across te ad coutres. Whle questoable, ths assupto s ecessary to reach coclusos fro the odel.

14 4 Takag Joural of Iteratoal Affars H = ) ( p p W + λ < 0, H = ) ( ) ( j j j j j j j j p p W W W p p W + + λ λ = [ ) ( p p W + λ ][ ) ( j j j j j j p p W + λ ] -W j >0 3 H = 3 3 deterat value < 0, et cetera. For splcty, we ca assue that a actor teracts wth oly two possble targets. I ths sple two-coutry case, dfferetatg the FOCs wth respect to ad, applyg the satsfed results of SOCs ad usg Craer s rule, we get: + + ( ) ( p p W W W p p W λ λ = 0 λp, = )] ( )][ ( [ )] ( [ W p p W p p W p p W p λ λ λ λ <0

15 Ecooc Iterdepedece ad Iteratoal Iteractos: The Relatoshp Betwee Trade, Foreg Ad, ad Tarff 5 ad slarly, λp [ W + λ( p p )] = [ W + λ( p p )][ W ( + λ p p )] W <0. Thus the actor s coflct toward the target falls as eports fro the actor to the target ad/or ports fro the target to the actor crease. Ths s the eolberalsts so-called result that trade reduces coflct. The et step, we wll eted ths trade-coflct odel to corporate foreg ad ad tarff effects. 3. Foreg Ad ad Coflct Poltcal scetsts (e.g. Abegur (990), Rchardso (978), Holst (98), ad Orr (989)) ofte look at the pact of foreg ad o teratoal relatos, such as how coutres use foreg ad as a struet to epad busess epres, receve busess beefts, ad affect the target coutry s poltcs. The target coutry offerg ad wll be referred to as the door, the actor coutry as the recpet. 7 We eae the effect of oe target coutry offerg ad to the actor, to the etet that such ad s to be used to purchase the target s eports. 8 We ca odel foreg ad as that the actor coutry gets v uts of ports fro the target. The balace of payets costrat s revsed by substtutg ( = p + v p ) for = p to receve v uts of ports fro the target # as a result of foreg ad fro coutry #. 7 As oted by a referee, the target coutry s usually a developed coutry ad the actor coutry s a less developed coutry. 8 Ths assupto s reasoable sce the foreg ad as a grat, ot a loa, usually eeds feedback to the door (target) fro the recpet (actor). Also see Kep (995, pp.365) ad 4.: Foreg Ad Data.

16 6 Takag Joural of Iteratoal Affars Defg cosupto to equal doestc producto us eports plus ports, oe ca specfy welfare as: W=W(Q+ + v - = = subject to a balace of payets costrat ( = p - = p, Z) (5) - v p = 0 ).9 (6) The actor aes ts welfare fucto whch ow corporates the pact of foreg ad: Ma L= W(Q+ + v - FOC: = =, Z)+λ( = p - = p - v P ) (7) W +λ( p ' -( + v )p ' )=0 (7a) W +λ( p ' - p ' )=0 (7b) : : : : W +λ( p ' - p ' )=0. (7) For dscussg the target # coutry offerg foreg ad to actor, the 9 Eve f t s ot a balace of payets (soe costat k>0 or k<0) due to foreg ad effect, the derved results wll ot chage (Polachek, 978). May thaks to a referee s coets.

17 Ecooc Iterdepedece ad Iteratoal Iteractos: The Relatoshp Betwee Trade, Foreg Ad, ad Tarff 7 actor coutry chooses a optal aout of coflct wth coutry # so as to equate the coflct's argal costs (( + v )p ' - p ' ) ad argal beefts (W /λ). For a sple two-coutry case, dfferetatg the FOCs wth respect to v, applyg the results of SOCs ad usg Craer s rule, we get: 0 v = [ W + λ( p λp ( [ W + v ) p + λ( p )][ W p )] + λ( p p )] W <0. Thus the creased ports brought about by the target s foreg ad to the actor reduce the actor s coflct toward the target. 3.3 Tarff ad Coflct Essetally, a crease (decrease) port tarffs ca be vewed as drectly decreasg (creasg) trade. As such, creased (decreased) tarffs have the sae pact as decreasg trade, ad hece crease (decrease) coflct. Suppose that target coutry # poses a port tarff o the actor s eports. Thus the actor wll decrease ts eports to the target coutry # where total eports to the target equal to ( - t ), ad t s a de deotg the tarff posed by the target coutry #. Whe t equals ero, eports to the target are equal to. Whe t equals oe, tarffs are suffcetly hgh to reduce eports to the target to ero. As the case of foreg ad, the actor aes ts welfare fucto, ow corporatg the pact of tarffs : 0 We assue W v =0. Oe ca epect that quotas posed (reoved) by the target have the sae effect as a crease (decrease) tarffs, ad hece crease (decrease) coflct.

18 8 Takag Joural of Iteratoal Affars = Ma L=W(Q+ - = + t, Z) +λ( = p - t p - = p ) (8) FOC: W +λ((-t ) p ' - p ' )=0 (8a) W +λ( p ' - p ' )=0 (8b) : : : : W +λ( p ' - p ' )=0. (8) For dscussg the target # coutry posg a tarff o actor, the actor coutry chooses a optal aout of coflct wth coutry # so as to equate the coflct's

19 Ecooc Iterdepedece ad Iteratoal Iteractos: The Relatoshp Betwee Trade, Foreg Ad, ad Tarff 9 MG MC MC* MC MC** B A C MG Cooperato Coflct Fgure : How Trade Gas Affect Iteratoal Iteractos. argal costs ( p ' - (-t ) p ' ) ad argal beefts (W / λ). For a sple two-coutry case, dfferetatg the FOCs wth respect to t, applyg the results of SOCs ad usg Craer s rule, we get: t = [ W + λ(( t λp [ W ) p p + λ( p )][ W p )] + λ( p p )] W >0. Thus the reduced eports brought about by the target-posed tarffs to the actor crease the actor s coflct toward the target. As slar as before, we assue W t =0.

20 0 Takag Joural of Iteratoal Affars 3.4 A Dagraatc Represetato The above optalty codtos are llustrated graphcally for the typcal th target Fgure. Fgure depcts how optal coflct s chose ad how trade gas (losses) decrease (crease) coflct. Lookg at fgure, curve MC depcts the argal cost of coflct. It s upward slopg dcatg that hgher levels of coflct result hgher costs. (Matheatcally ths upward slope occurs because the secod dervatve of the balace of payets costrat s postve.) The MG curve depcts the argal welfare gas fro coflct. The optal aout of coflct toward the th target coutry s where the MG ad MC curves tersect at pot A. If there were o welfare gas fro coflct, the MG curve would be syoyous wth the horotal as, plyg the optal level of coflct would be detered by the pot at whch the MC curve tersects the horotal as. Oe ca apply Fgure to llustrate how foreg ad, tarff ad trade affect coflct. The foreg ad creases trade due to greater actor s ports. Iport ad eport values are cotaed the argal cost fucto. Sce p ' s postve, greater port levels ply a larger (.e. ( +v )) ad a hgher MC curve. I tur, ths hgher argal cost curve ples less coflct sce the MC * curve ow tersects the MG curve further to the left at pot B. O the cotrary, tarff decreases trade due to saller actor s eports. Sce p ' s egatve, saller eport levels ply a saller (.e. (-t ) ) ad a lower MC curve. Therefore, ths lower argal cost curve MC ** ow tersects the MG curve further to the rght at pot C, ad hece hgher levels of coflct. 4. The Data Pror research typcally uses war data such as the Mltared Iterstate Dspute (MID) data set. MID defes a ltared dspute as a teratoal teracto volvg threats, dsplays, or actual uses

21 Ecooc Iterdepedece ad Iteratoal Iteractos: The Relatoshp Betwee Trade, Foreg Ad, ad Tarff of ltary force; t ust be eplct, overt, goveret sactoed, ad ot accdetal. Our prary source of data o coflct ad cooperato s the Coflct ad Peace Data Bak (COPDAB). COPDAB s a etesve, logtudal collecto of ore tha 350,000 daly ad yearly evets reported by dyad. 3 Evets are obtaed as reported fro 7 ewspaper ad joural resources. These evets are coded o the 5-pot scale represetg dfferet kds of cooperato ad coflct. We cocetrate o aual easures of coflct ad cooperato for each dyad a 30- coutry saple, wth data pooled for the years COPDAB s dstct fro the MID data set at least two ways. Frst, t cotas forato o both cooperatve ad coflctual evets. Secod, t cotas data o both severe ad ld fors of coflct ad cooperato. Oe proble wth ths type of data s that certa coutres are ore ewsworthy tha other coutres. If ewspapers cocetrate o certa coutres, these coutres wll have ore coflct ad cooperato our data. These types of selectvty ssues are reduced by lookg at relatve coflct,.e., the frequecy of coflct us the frequecy of cooperato for a dyad. I ths way, uder or over reportg s reduced by cocetratg ot o the absolute frequecy of reported evets, but stead o the relatve aout of coflct. We defe et coflct (NETF) as the frequecy of coflctual evets (those categores 9 to 5) us the frequecy of cooperatve evets (those categores to 7). A postve value ples a et coflct, whle a egatve value ples a et cooperato. Cosstet wth Aar (978), o average, coutres cooperate ore tha they coflct, wth the average dyad havg.6 coflctual evets ad.7 cooperatve evets each year. Ths easure s crtced sce a dyad wth a hgh degree of teracto (both hgh coflct ad 3 For a clear uderstadg of COPDAB, see Aar (980) ad Polachek (980). 4 For the 30-coutry saple, see Polachek (997), pp. 303, Table 4.

22 Takag Joural of Iteratoal Affars cooperato) ght have the sae et coflct as a dyad wth o teracto. I both cases et coflct s ero despte dffereces dyadc teracto. 5 As such, soe argue that war data are ore approprate for eag teratoal teractos. However, war data have a slar proble as dyads wth a hgh degree of teracto, ad appear the sae as dyads that oly coflct ad do ot cooperate. Iport ad eport data o a coutry drectoal bass U.S. dollars are copled by Gllespe ad Zes (.d.). Sources for these data are foud the Iteratoal Moetary Fud seres of aual volues uder the headg Drecto of Trade. Stadarded varables are cluded to hold other factors that ay affect both trade ad coflct costat. Baks (973) Cross-Natoal Tes-Seres Data Archve s used to select 3 coutry attrbutes over each of the years. These attrbutes are selected prarly because they have the least ssg forato. I addto, the data o defese epedtures (copled ostly fro the UN Statstcal Yearbook by Gllespe ad Zes) that are used to stadarde for geeral levels of coutry ltacy are cluded. 4. Foreg Ad Data The foreg ad data are fro the Statstcal Abstract of the Uted States ( ), the Statstcal Yearbook / Uted Natos ( ) ad Geographcal Dstrbuto of Facal Flows to Less Developed Coutres ( ), Orgaato for Ecooc Cooperato ad Developet. We focus o ad the for of grats, ad eclude loas or credts sce loas or credts are ofte repad. Grats are ot repad ad are ore cosstet wth Foreg Ad Proposto. We have forato o blateral foreg ad for s 5 A dyad wth a hgh frequecy of both coflct ad cooperato, stll shows a oderate relatoshp, but oly the case of a hgh frequecy of teractos. For further dscusso, see Masfeld ad Polls (00) ad Polachek (forthcog).

23 Ecooc Iterdepedece ad Iteratoal Iteractos: The Relatoshp Betwee Trade, Foreg Ad, ad Tarff 3 coutres: USA, Uted Kgdo, Caada, Frace, Geray ad Italy, wth total 40 observatos. 4. Tarff Data The tarff data are fro the Statstcal Abstract of the Uted States (948-96), Foreg Coerce ad Navgato of the Uted States ( ) ad Hghlghts of US Eport ad Iport Trade FT 990 ( ), Bureau of the Cesus. The tarff rate represets total Calculated duty collected dvded by the Dutable value of ports for cosupto, ultpled by 00. The Dutable value represets, geeral, the custos value of foreg erchadse ported to the Uted States subject to duty. The Calculated duty represets the estated port dutes collected. Estated dutes are calculated based o the applcable rates of duty as show the Haroed Tarff Schedule of the Uted States Aotated for Statstcal Reportg Purposes. All 9 coutres are the saple wth a total of 54 observatos. 5. Eprcal Aalyses I order to keep the eposto as clear as possble, the theory secto used a sgle subscrpt to deote targets. The reader of the paper uses two subscrpts to deote the actor ad target. We apply ordary least squares ultvarate regressos to test the propostos. I addto, for eplct tests of the propostos, t s ecessary that the estatos of et coflct ad trade be sultaeously treated as edogeous varables the syste. 5. Trade Proposto: The Trade proposto clas that there s a verse relatoshp betwee trade ad coflct. Coutres that are tradg parters have hgher costs to coflct tha o-tradg parters, ad are ore lkely to cooperate ad less lkely to fght. We test ths proposto two

24 4 Takag Joural of Iteratoal Affars dfferet ways. Frst we assue trade s eogeous to the syste ad use ordary least squares ultvarate regressos to eae the relatoshp betwee trade ad coflct where equato (9) s estated. Net Coflct j =β 0 +β Trade j +β A +β 3 A j +ε (9) where Net Coflct j =the frequecy of et coflct fro the coutry toward the target coutry j; Trade j =eports fro the actor coutry to the target coutry (X j), or ports of the actor coutry fro the target coutry (M j); A =a vector of actor coutry attrbutes; A j =a vector of target coutry attrbutes; ε=a rado error ter orally dstrbuted wth ea ero. Secod we assued trade s edogeous ad use three-stage least squares to look at the trade-coflct relatoshp. The results are provded Table where the attrbutes of actor ad target are cotrolled, ad support the proposto as there s a egatve ad statstcally sgfcat trade-coflct relatoshp. As eports crease fro coutry to j, ad/or ports crease fro coutry j to, et coflct targeted by coutry to j decreases. The greater the level of trade egaged by a par of coutres, the lower the coflct betwee the. The elastcty of coflct wth respect to eports dcates that a oe percet creases eports s assocated wth a 0.3 decrease et coflct. Thus doublg eports betwee two coutres ples that o average there would be a 3 percet decle the relatve frequecy of coflct. Slarly doublg ports betwee two coutres ples that o average there would be a percet decle the relatve frequecy of coflct. Secod, we cosder trade to be edogeous to the odel. The results above dcate a egatve relatoshp betwee coflct ad trade. However, t s uclear whether trade s causg (reducg)

25 Ecooc Iterdepedece ad Iteratoal Iteractos: The Relatoshp Betwee Trade, Foreg Ad, ad Tarff 5 coflct as predcted by the trade proposto the trade-coflct odel, or whether a crease coflct causes a decrease trade. To test for causalty oe ca vew the trade-coflct relatoshp as a sultaeous set of equatos. I oe equato coflct affects trade, whle the other trade affects coflct. I effect both trade ad coflct are treated edogeously whle coutry attrbute data are used as eogeous factors for detfcato. Three-stage least squares estato s perfored, sce three-stage least squares ethod takes to accout the covaraces betwee error ters of dfferet equatos. The results Table show that the causalty s as predcted. Eve stroger, ore egatve coeffcets ( versus eports ad versus ports) are obtaed, whle statstcally sgfcat coeffcets are obtaed for the pact of coflct o eports ad ports. Thus, eve whe accoutg for sultaety, creases trade dsh coflct Foreg Ad Proposto: The theory predcts a verse relatoshp betwee a target s foreg ad to a actor ad the actor s coflct toward the target. We eae ths proposto three dfferet ways. Frst we clude the foreg ad varable equato (9) to detere f there s a drect effect of foreg ad o coflct: Net Coflct j =β 0 +β Trade j +β Ad j +β 3 A +β 4 A j +ε (0) where Ad j =foreg ad fro target coutry j to actor coutry. Secod, we detere f foreg ad has dfferet effects o coflct for tradg ad otradg dyads. Ths s doe by addg a teracto betwee ad ad eports (ports) to the specfcato. The 6 See Gasorowsk ad Polachek (98) for te seres Grager causalty tests dcatg that trade causes cooperato, rather tha the reverse.

26 6 Takag Joural of Iteratoal Affars thrd test cosders the possble edogeety of trade. We treat coflct ad trade as edogeous varables ad use three-stage least squares estato to test the relatoshp betwee foreg ad, et coflct ad trade. The results testg the drect relatoshp betwee foreg ad ad coflct are provded Table 3. The egatve coeffcets o foreg ad dcate that foreg ad fro the target to the actor reduces the actor s coflct toward the target. Elastctes of coflct wth respect to foreg ad predct that a oe percet crease ad s assocated wth a decrease coflct (crease cooperato) rage by 0.53 to Thus doublg foreg ad fro the target to the actor coutry ples that o average there would be a 53 to 73 percet decle the frequecy of et coflct fro the actor toward target. The argal effect of foreg ad reducg coflct s eve stroger tha trade. However, o average, ad s uch saller value tha ports, ad trade s ore portat tha ad. The secod test deteres whether the effect of foreg ad dffers betwee tradg ad otradg dyads ad the results are provded Table 4. By cludg a teracto betwee ad ad ports (eports) the specfcato, t ca be detered whether the effect of ad vares wth trade. Iterestgly, the effect of ad o coflct s greater for o-tradg parters tha tradg parters. The egatve coeffcets o ad ad the postve coeffcets o the teractos ply that ad decreases coflct ore f the coutres do ot trade. Oe possblty s that foreg ad ad trade are substtutes deterg the level of terdepedece betwee coutres. As log as there are dshg argal effects of terdepedece o coflct, foreg ad to a otradg parter wll reduce coflct ore tha foreg ad to a tradg parter. The thrd test cosders the possble edogeety of trade. I the proof of ths proposto we assue the recpet (actor) ust use the ad to buy the door s (target s) eports, thus ad to a actor should

27 Ecooc Iterdepedece ad Iteratoal Iteractos: The Relatoshp Betwee Trade, Foreg Ad, ad Tarff 7 crease the target s eports to the actor. I other words, foreg ad ay have both a drect ad drect effect o coflct. Ad to the actor ay drectly lead to a decrease actor to target coflct. I addto, ad to the actor ay allow the actor to purchase goods fro the target, leadg to a drect effect o coflct through a crease trade betwee the coutres. To eplctly test the propostos, et coflct ad trade are treated as edogeous varables three-stage leastsquares estato wth coutry attrbute data used as eogeous varables. I Table 5, the postve argally sgfcat foreg ad effect o the actor s ports shows that the greater the ad to the actor, the ore the actor ports fro the target coutry. After cosderg the edogeety, foreg ad drectly reduces et coflct (-0.004), ad also drectly reduces et coflct through a crease ports. The elastcty of et coflct wth respect to foreg ad s ow coposed of two copoets: a drect ad drect effect. The drect effect fro a oe percet chage foreg ad s calculated as: NetCoflct Ad Ad NetCoflct whch equals.037 whe cotrollg for ports. The drect effect cosders how foreg ad affects ports, ad thus affects coflct through ports. The drect effect fro a oe percet chage foreg ad s calculated as: I ports Ad NetCoflct I ports * Ade I ports I ports NetCoflct ad equals.0. Thus the total effect fro a oe percet chage foreg ad s a ( ) reducto et coflct after cosderg the edogeety of trade. By allowg for foreg ad to affect trade, the fluece o et coflct s greater tha whe holdg trade costat. That the drect effect of foreg ad for provg

28 8 Takag Joural of Iteratoal Affars teratoal relatos s greater tha drect effect s cocevable. The role of foreg ad deterg trade has partcularly portat polcy plcatos sce foreg ad as a gft echage s soewhat poltcally upopular, but stll postve. The potetal crease trade as a result of foreg ad s frequetly overlooked cosderg the beefts of gratg foreg ad to a coutry. Sce we fd that ad creases ports to the actor fro the target, we provde a beeft to gratg ad to coutres. Every $ foreg ad creases ports by $.87. Presuably soe of the ad s used to purchase goods, but addtoal trade also appears to be geerated. O the other had, we do t have a sgfcat foreg ad effect o eports. It s possble that a target wll offer foreg ad to a actor order to port goods fro the actor. For eaple, ths ay occur f the target s arkets are closed to the actor s eports. Aother possblty s that the target offers ad to a actor to support a log ter ports of a strategc coodty such as ol. For a log ru poltcal relatoshp wth the actor ad log lastg supply of a strategc coodty, such foreg ad s worthwhle. However, such a relatoshp s less clear tha the possblty of ad to the actor leadg to a crease the actor s ports fro the target. 5.3 Tarff Proposto: The theory predcts a postve relatoshp betwee tarffs posed by the target agast the actor ad actor to target coflct. To test ths proposto, the equato () s estated where tarff varable s added. 7 Net Coflct j =β 0 +β Eport j +β Tarff j +β 3 A +β 4 A j +ε () where Tarff j =dutes collected by j o ports fro dvded by total 7 Sce the three-stage least squares estatos of tarff varable are ot sgfcat, we oly estate equato (). Thaks for the referee s otfcato.

29 Ecooc Iterdepedece ad Iteratoal Iteractos: The Relatoshp Betwee Trade, Foreg Ad, ad Tarff 9 dutable ports by j fro ( percet). The results are provded Table 6 where colu () shows a sgfcatly postve coeffcet o the tarff rate. However, a quadratc for colu (3) s soewhat supportve of the proposto. I colu (3) whe cotrollg for actor s eports: Coflct Tarff j j = *Tarff j > 0 f Tarff j > 6.7 < 0 f Tarff j < 6.7. That s f the target s tarff rate s greater tha ths crtcal level (.e., 6.7), a further crease tarffs leads the actor to crease coflct toward the target. Coutres ght accept a reasoable tarff for the protecto of doestc producto, but t caot be over a tolerable level. As such there ests soe evdece that tarffs stll crease coflct uder certa codtos. It s oral for tarff rates to dffer fro oe product to the et. Tarff effects caot evdetly affect teratoal relato s foresee. Ths ca be ferred fro the recprocal trade lberalato uder the GATT sce 947. For these reasos, t s dffcult to fd sgfcatly eprcal results. However f oe day, the world or/ad ay two coutres get volve trade protecto, t wll deftely create soe kd of coflct. These trade frcto coflcts wll probably create other kds of coflcts. As such, tarff creases coflct s belevable. Because utl ow, the serous coflcts due to tarff dd ot happe the world, people wll gore ts portace o teratoal teractos. I effect, oce the tarff rate s over soe crtcal level, t wll create ecooc coflcts, ad the ore other coflcts.

30 30 Takag Joural of Iteratoal Affars 6. Cocluso ad Polcy Iplcatos I 978, Soloo Polachek developed trade-coflct odel whch claed that creased trade betwee coutres reduces coflct. The purpose of ths paper s to look at the pact of foreg ad ad tarff o the teratoal relatoshps. To llustrate these effects, we eted trade-coflct odel whch a actor aes a plausble socal welfare fucto subject to a balace of payets, to eae how the gas fro trade are affected by these factors, wth foreg ad creasg the gas fro trade ad tarffs reducg gas fro trade. The odel predcts that foreg ad reduces coflct ad tarff creases coflct. The classcal lberal thess that trade prootes peace betwee states s based o two deas: trade betwee two states creases the ecooc costs of wagg war, ad a heret facet of creased trade s creased coucato betwee states. The creased coucato betwee states reduces the possblty of suderstadg ad fosters peaceful resoluto of coflct (Hegre, 000, pp.5). Ths research eprcally eaes the relatoshp betwee trade, foreg ad ad tarff. The eprcal tests usg the Coflct ad Peace Data Bak provde supports for the hypotheses that are derved fro the odel. Trade reduces coflct betwee states ad the causalty fro trade to coflct reas. Tarff decreases trade ad coucato, ad the creases coflct. Foreg ad creases trade ad coucato, ad the prootes peace. Ths study shows that foreg ad ad tarffs cotuously play portat roles teratoal relatoshps. The polcy plcato of ths paper s straghtforward. Ecouragg free trade teds to decrease coflct ad crease cooperato. Baro de Motesqueu (900, pp. 36) stated: Peace s the atural effect of trade. Two atos who traffc wth each other becoe recprocally depedet: for f oe has the terest buyg, the other has the terest sellg; ad thus ther uo s fouded o the utual ecesstes. Wth deocracy beg a

31 Ecooc Iterdepedece ad Iteratoal Iteractos: The Relatoshp Betwee Trade, Foreg Ad, ad Tarff 3 worldwde tred, ost coteporary leaders clg to ths logstadg belef that epadg ecooc tes wll crease the bods of fredshp ad elate the thought of a resort to ars (Masfeld ad Polls, 00, pp. 855). If the trade gas crease coutres welfare ad serous coflct aog coutres dsrupts trade, trade wll proote peace ad creased world trade wll ake the a a fred of a fred s a fred a realty. Table The Relatoshp betwee Coflct ad Trade Depedet Varable: Net Coflct ( j ) () () (3) (4) Itercept -.7** (- 8.85) Eport ** (- 8.3) -.54** (- 8.0) ** (-.7) -.04** (- 8.0) - 0.9** (- 7.06) Eport-squared ** (8.7) Iport ** (- 0.5) ** (- 5.0) Iport-squared ** (.) Pop-actor ** (.) ** (.0) ** (3.6) ** (3.74) Pop-target ** (-.74) ** (-.7) (- 0.8) (.04) GNP-actor ** (-.) GNP-target ** (6.47) ** (- 9.89) ** (7.49) ** ** (- 0.8) (- 9.53) ** (0.6) ** (.7) R-squared

32 3 Takag Joural of Iteratoal Affars N ε ep ort 0. ε port 0.8 T-statstcs are paretheses, * dcates sgfcat at the 0 percet level, ** sgfcat at the 5 percet level, elastcty coputed as ( eport ep ort ) or ( port port ). Table Three-Stage Least Squares Estates of the Trade-Coflct Relatoshp Depedet Varable: Z j X j Z j M j () () Itercept ** ** ** (- 4.3) (- 3.4) (- 4.3) (- 3.47) Eports (X) ** (- 5.58) Iports (M) ** (- 5.45) Coflct (- 0.58) Defese Epedtures Populato Desty Actor ** (- 5.66) Target ** (- 7.97) Actor ** (- 3.3) Target ** (- 3.77) ** (- 5.66) ** (- 7.69) ** (-.69) ** (- 4.) -.90 (- 0.37) GNP Actor ** ** **. 0 7 (3.05) (3.4) (.97) (.8) Target ** *

33 Ecooc Iterdepedece ad Iteratoal Iteractos: The Relatoshp Betwee Trade, Foreg Ad, ad Tarff 33 (7.39) (.54) (7.9) (5.3) Hghway Vehcles Actor 078.6** 09.6** per capta (7.0) (6.36) Target 945.3** 054.6* (6.7) (6.99) Secodary School Actor 0.06* 0.089** Erollets (.65) (.6) Target 0.08** (.) (.6) Electrcal Producto Actor per capta Aual Populato Actor Growth (- 0.65).05 (0.) Target (0.38) (-0.6) * (-.75) - 0.4** (-.6) Target - 0.4** (-.8) (-.45) Syste Weghted R-squared N T-statstcs are paretheses, * dcates sgfcat at the 0 percet level, ** sgfcat at the 5 percet levels. Table 3 The Relatoshp betwee Coflct ad Foreg Ad Depedet Varable: Net Coflct ( j ) () () (3) (4) Itercept ** (-.4) (- 0.67) -.77** (- 4.) Ad ** (- 4.33) ** (- 3.47) ** (- 4.3) ** (- 7.74) Iports - 0.0** (- 7.0) Eports - 0.0**

34 34 Takag Joural of Iteratoal Affars (- 6.03) Pop-actor 0 5 ** (4.6) R-squared N ε ad T-statstcs are paretheses, * dcates sgfcat at the 0 percet level, ** sgfcat at the 5 percet level, elastcty coputed as ad ( ). The varables wth sgfcat coeffcets are ad dropped fro the regressos. Table 4 The Relatoshp betwee Coflct ad Foreg Ad Depedet Varable: Net Coflct ( j ) () () (3) (4) Itercept (- 0.95) (- 0.7) -.3 (-.33) (- 0.7) Ad ** (-.79) ** (-.33) - 0.** (- 5.8) - 0.0** (- 4.55) Ad*Iports ** (4.87) Iports ** (- 6.7) ** (- 7.8) Ad*Eports ** (3.6) Eports - 0.** (- 5.96) ** (- 6.90) Pop-actor

35 Ecooc Iterdepedece ad Iteratoal Iteractos: The Relatoshp Betwee Trade, Foreg Ad, ad Tarff 35 (.09) (0.60) (.47) (0.74) Pop-target (- 0.0) (- 0.03) (0.84) (0.78) GNP-actor (- 0.3) (- 0.03) (- 0.57) (0.0) GNP-target (0.9) (- 0.7) (- 0.3) (- 0.74) R-squared N T-statstcs are paretheses, * dcates sgfcat at the 0 percet level, ** sgfcat at the 5 percet level. Table 5 Three-Stage Least Squares Estates of the Trade-Coflct Relatoshp wth Foreg Ad Effect Depedet Varable: Z j M j Z j X j () () Itercept (- 0.73) - 9.9** (- 3.4) - 0. (- 0.3) Eports (X) ** (- 5.) Iports (M) ** (- 3.3) Coflct 0.8 ( 0.) Ad *.87* (-.8) (.85) (-.4) Defese Actor ** ** Epedtures (-.0) (-.) Target * (-.86) (-.4) Populato Actor Desty (- 0.56) (0.6) Target ** - 8.* (-.77) - 3.* (-.83) 0.68 (0.77)

36 36 Takag Joural of Iteratoal Affars GNP Actor Target (- 0.69) (- 0.7) ** (4.8) * (.86) * (.85) ** (-.9) ** (4.9). 0 8 (.) ** (3.6) * (-.79) Hghway Vehcles Actor * per capta (0.5) (.66) Target 6** (3.8) 48.7* (.76) Secodary School Actor 0.57** 0.3** Erollets (8.3) (4.43) Target 0.08 (.0) 0.07 (.) Electrcal Producto Actor 4.8** 3.8 per capta (3.53) (.3) Target - 46.** (-.86) - 5.3** (-.6) Aual Populato Actor - 0.3* Growth (-.89) (-.4) Target - 0. (0.77) 0.4 (.6) Syste Weghted R-squared N 9 85 T-statstcs are paretheses, * dcates sgfcat at the 0 percet level, ** sgfcat at the 5 percet level. Table 6 The Relatoshp betwee Coflct ad Tarffs Depedet Varable: Net Coflct ( j ) () () (3) Itercept ** (- 4.30) ** (- 5.3) - 7.8** (-.00) Tarff rate ( 0.9) (-.04) - 0.0** (- 3.93) Tarff-squared 0.034**