Open trade is key to political stability and deters wars

No economist is in doubt about the positive effects of trade for the national economy welfare (for example Krugman and Obstfeld, 2000). According to the neoclassical perspective, trade renders the division of labor between states more efficient. States that have opened up to international competition use their comparative advantage, and thus can produce and consume more goods than autarkies. In free trading states, prices approach world market prices. Protectionist measures, by contrast, increase the wedge between the national and the international price of a good. Sachs and Warner (1995) show that economically open developing countries grow faster and can better prevent balance of payments crises than comparable closed economies. Plümper (2001) qualifies this argument but does not deny that reducing trade barriers has a positive effect. In order to benefit from the welfare gains, regulative conditions have to be present for flourishing free trade. The degree to which a state shields its economy against foreign competition largely determines to what extent it can realize welfare gains from free trade. Free trade can minimize the risk of domestic conflict in two ways. First of all, trade increases the welfare for the general population, and thus reduces factors that can lead to instability, as stated by the theory of deprivation (Gurr, 1971). According to the Stolper-Samuelson theorem of international trade, the abundant factors in a country profit from free trade. In developing countries this is, depending on how factors are divided, either labor or unskilled labor (Wood, 1994). In any case, it is the masses of the population that benefit from trade liberalization. However, the question arises whether economic openness increases income inequality. Here the empirical evidence is split. According to Fischer (2001), income inequality declined after economic liberalization in South East Asia, while at the same time it increased in Latin America. Other studies found either no relationship between the two variables or they arrived at the conclusion that countries experienced a fairer distribution of income through openness (Bourguignon and Morrisson, 1990; Bussmann et al., 2002; Edwards, 1997). If free trade really leads to more income equality, we can expect an additional reduction in the risk of political conflict. Rich and satisfied citizens are, according to the theory of deprivation, less involved in protests than poor and disadvantaged people. Furthermore, gains from trade increase the interest in maintaining a free trade regime. Violent conflicts would be a hindrance to this commercial spirit. Thus, it is in a country’s interests, as well as in that of its citizens, to guarantee domestic peace and stability. This second line of reasoning is an extension of the liberal and democratic peace literature. In accordance with Immanuel Kant, several researchers argue that democratic states and states that are integrated into the world economy have a lower risk of fighting each other. War disrupts trade flows between countries, and therefore is too costly for a state and its citizens (Russett and Oneal, 2001). In addition, trade enforces liberal norms that are opposite to war and violent conflicts (Kant, 1795 [1987]). This argumentation, as applied to interstate wars, is widely discussed and finds considerable empirical support (Barbieri and Schneider, 1999; Russett and Oneal, 2001; Schneider et al., 2003). The same logic could be transferred to intrastate conflicts. Extreme forms of domestic instability are an obstacle to free trade and reduce potential gains that could be achieved through foreign economic liberalization in the long run. The relevant actors will include free trade in their cost-benefit calculations when they consider domestic strategies. An escalation of quarrels about the foreign economic orientation of a country is thus counterproductive for all participants because it deters foreign investors and trading partners. In case of an escalating domestic conflict, the parties —unions and employers, export-oriented and import-substituting industries— are all in the same boat. Concerning the long-term effects of economic liberalization, we assume that economic openness helps to enhance economic development. The incentives for political opponents to find a peaceful solution for the conflict will be higher. Besides, liberal norms of conflict resolution are widespread, as postulated by transactionalism for half a century already (Deutsch et al., 1957). Based on the above arguments, we hypothesize that more open states are less susceptible to political instability.