Defense pacts and international trade

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 in distinguishable from trade between non-allies. This article recognizes that a link between economic and security issues exists and emphasizes their mutual relationship.