JSPES, Vol. 30, No. 1 (Spring 2005)
pp. 41-78

Bilateral Trade and International Interactions: The Impact of Foreign Aid and Tariffs on Political Conflict and Cooperation

Yuan-Ching Chang

Department of Economics

The trade-conflict model claimed that trade reduces conflict. This paper extends the trade-conflict model to incorporate foreign aid and tariff effects. The theoretical propositions supported by proofs are as follows: trade and foreign aid reduce conflict and tariffs increases conflict. Empirical tests show that trade reduces conflict between states and the causality from trade to conflict remains. Foreign aid directly decreases conflict. The marginal effect of foreign aid in reducing conflict is greater than that of trade. However, foreign aid is much smaller in magnitude than trade and trade is more important than aid in affecting international relationships. In addition, the foreign aid effect is greater for non-trading partners than trading partners. Foreign aid increases trade, and thereby indirectly decreases conflict since trade reduces conflict. However, the indirect effect of foreign aid decreasing conflict will be smaller than the direct effect. Tariffs, if over a critical level, will increase conflict.