Does Trade Promote Peace?

Pavel Yakovlev,

Release Date
March 13, 2012


Free Markets and Capitalism

Economics evidence has long demonstrated that free trade benefits all nations by increasing their standards of living and wealth. Professor Pavel Yakovlev argues that empirical evidence shows that free trade promotes peace. He provides the following reasons for this outcome:

  • Trade makes countries more commercially interdependent and provides strong incentives to avoid war. This is known as the capitalist peace theory.
  • Countries that trade a lot with each other have a lot to lose if war breaks out.
  • Free trade and bargaining is the most cost effective way of resolving disputes and obtaining resources, while war is a costly way of doing the same things.
  • Free trade brings more goods and ideas into a country and also promotes tolerance and understanding.

Professor Yakovlev also discusses a few examples of evidence that supports this argument. Trade not only increases prosperity in countries, but it also has been shown to promote world peace.

Desert Island Game (game, beginner): Can you learn something about trade and cooperation by being marooned on a desert island?
Trade Ruler (game, advanced): As the Supreme Ruler of an island, you want the country to prosper. By engaging in international trade, you can achieve this goal.

Does Trade Promote Peace?
Since the days of Adam Smith, many economists have argued that free trade benefits all nations by increasing their standards of living and wealth. Yet, there is another very important but commonly overlooked benefit of free trade, which is its ability to promote international peace.
The Capitalist Peace Theory argues that free trade makes countries more commercially interdependent. This interdependence gives countries a strong incentive to keep hostilities low. Think about it: Countries that trade a lot with each other have a lot to lose if a war breaks out.
Economists also argue that free trade and bargaining is a lot more cost-effective way of resolving international disputes and obtaining resources. War is a very costly way of going about doing the same thing. If we look at countries that trade a lot with each other, these are some of the countries that import many ideas from the rest of the world. So free trade comes with not just goods that you import from other countries, but it also comes with exchange of ideas and culture, making countries more tolerant of each other’s differences and more understanding.
Several empirical studies show that countries that trade a lot with each other are also less likely to go to war with each other. Yet, critics point out that World War I broke out after an increase in trade flows. However, research shows that trade flows rose before World War I as a result of lower transportation costs. Ships became faster and bigger, transportation costs became lower, trade increased as a result. At the same time, however, nations like France, Germany, and Russia increased their trade barriers. They became more isolationist and less interdependent. The result is World War I.
As if predicting this outcome, Frédéric Bastiat once wrote, “If goods can’t cross borders, armies will.” And we see this in the empirical evidence. The Global Peace Index measures internal and external peacefulness and ranks countries like Ireland, New Zealand, and Netherlands as being some of the most peaceful nations in the world. These are some of the most heavily trading nations in the world as well.
In summary, economists argue that free trade not only makes nations more prosperous but also promotes world peace.