Trade Still Follows the Flag: U.S. Security Strategy and
the Value of Bilateral Trade
Vincenzo Bove ∗
Department of Government
University of Essex
Leandro Elia †
Institute for the Protection and Security of the Citizen
European Commission-Joint Research Centre
Petros G. Sekeris ‡
Department of Economics
University of Namur
PRELIMINARY AND INCOMPLETE
Abstract
The relationship between trade and “flag" -i.e. national security interests
and foreign-policy goals - has led to growing debates in the field of international economics and international relations. Most studies use militarized
interstate disputes (MIDs) to proxy the flag. However, national security interests do not necessarily involve conflicts. We focus on the the U.S., the world’s
largest trading nation. While the U.S. has deployed more forces abroad and
in more countries than any other military in the world history, it is also the
largest contributor of military aid to foreign countries. Both instruments of
foreign policy have the same stated goal, contributing to regional and global
stability and containing transnational threats. They are essential, yet expensive, tools of foreign policy and can serve as more nuanced measures of flag.
We explore the geo-strategic determinants of bilateral trade flows between
the U.S. and the rest of the World by means of an augmented log gravity
model and newly constructed data on U.S. troop deployments and bilateral
Foreign Military Financing (FMF) since 1950. We find that both tools have
significant, positive impacts on bilateral trade, results that are robust to other
known causes of trade and endogeneity issues. Moreover, our corrected model
specification leads to a stronger relationship between trade and flag than in
the traditional models.
JEL Classification : F12; F15
∗ [email protected]
† [email protected]
‡ [email protected]
Trade Still Follows the Flag: U.S. Security Strategy and the Value of Bilateral Trade 2
1
Introduction
“Does the flag follow the trade?" This is one of the most debated questions in the study of
international relations and international economics. The economic ties between nations
are undoubtedly affected by the quality of bilateral diplomatic relations and the relationship flag-trade is possibly the most convincing evidence of the fact that economics and
politics are inextricably intertwined. The flag is generally regarded as a measure of the
foreign-policy goals of a country, in particular the security concerns. Much previous research identifies those goals by looking at the likelihood of military contests between pairs
of countries. In 1750, Baron de Montesquieu made the claim that peace is the natural
effect of trade. In similar vein, yet reversed, a large number of economists and political
scientists have maintained that trade among nations leads to peace. Since Polachek (1980)
attempted to derive a mathematical model of trade and conflict and presented empirical
evidence, a growing empirical literature has been testing the effects of trade on peace to
support the Liberal "‘Kantian Peace"’ claim that trade reduces conflict (e.g. Oneal & Russett, 1999; Russett et al., 2002; Hegre et al., 2010). According to this literature, countries
that engage in trade are less likely to go to war with commercial partners (see Mansfield
& Pollins, 2001; Schneider et al., 2003; Polachek & Seiglie, 2007; Polachek, 2011, for exhaustive reviews of this literature). Consequently, this literature implies that there is no
reason to rule out a positive link from trade to peace. However, the relationship between
international politics and trade it is not clear-cut and has sparked a long-lasting debate
about whether trade produces conflict, or whether conflict reduces trade.
In fact, a smaller number of studies reverses the causal arrow and evaluates the effects
that conflict has on trade. A trade disrupting effect of war is empirically well grounded in
both the economic literature (Glick & Taylor, 2010; Martin et al., 2008) and the political
science literature (Pollins, 1989; Mansfield & Bronson, 1997; Keshk et al., 2004). Yet, a
consistent number of studies find that that the effect of conflict on trade is not statistically
significant (Morrow et al., 1998, 1999; Edward & Pevehouse, 2000). Interestingly, Martin
et al. (2008) suggest that higher trade flows may not lead to more peaceful relations,
because what matters ultimately is the geographical structure of trade and its balance
Trade Still Follows the Flag: U.S. Security Strategy and the Value of Bilateral Trade 3
between bilateral and multilateral openness. As Glick & Taylor (2010) point out, the
absence of any uniform conclusions in these studies may be attributable to methodological
differences in terms of sample characteristics. These studies usually restrict their samples
to politically relevant cases - i.e. country pairs involving one or more major powers or
geographically contiguous states - and exclude country pairs that are unlikely to engage in
conflict. This sample restriction introduces the possibility of bias in the selected sample.
Common to both research strands is the use of the militarized interstate disputes
(MIDs) to capture conflict-related dynamics. While MIDs provide a rough proxy for
flag concerns, national security interests may not necessarily involve military disputes.
Our paper is part of the research activity on the impact of international politics on
international economics; the objective is to map two of the many possible connections
between international politics and commercial ties. We extend the conventional conflicttrade relationship and focus on one country, the United States, the world’s largest trading
nation and one of the hegemonic powers since the end of WWII. While there is much
observable evidence to attest to this hegemonic role (e.g. voting power in IMF, veto
power in the UN Security Council, the size of its economy and its defense budget), the U.S.
foreign policy has been the subject of much debate, praise and criticism both domestically
and abroad. Among others, two peculiar and expensive diplomatic tools signal U.S.
commitment to a particular region: the deployment of troops and the use of military
aid. We take them as a symbol of commitment even if the deployment of troops or
the allocation of miliary aid is not militarily or strategically essential to any particular
campaign.1
Much of what has been written in recent years on the subject of U.S. troop deployments
abroad under non-combat circumstances or U.S. military aid deals with the original aims
of the troop deployments or with the US military aid decision-making process (Poe &
Meernik, 1995; Meernik et al., 1998). In contrast, what we want to focus on in this paper,
and what has had much less attention devoted to it, is the effect that troop deployment
and military aid have on the economic interactions of the host/recipient states2 with the
1 Other tools of U.S. foreign policy are the U.S. defense establishment, the diplomatic corps, public
diplomacy, and trade policy.
2 We use "‘host country"’ to indicate the place where U.S. troops are stationed and "‘recipient country"’
Trade Still Follows the Flag: U.S. Security Strategy and the Value of Bilateral Trade 4
United States. We identify the effect of changes in U.S.-to-countries diplomatic relations
on bilateral trade flows.
Even though we focus on flag-induced trade flows, we obviously recognize the possibility of a reverse link from trade to flag and the likely omission of co-determinants of
economic gains and flag concerns, implying that we will confront serious endogeneity issues. We address concerns about the endogeneity of flag and trade through instrumental
variables (IV) estimations.3 The effects of flag on international trade are estimated using
a gravity model of international trade, which is the benchmark empirical model for this
kind of exercise in the international economics literature. The standard gravity model
of trade is augmented with a number of important explanatory variables, including our
measures of flag. This inclusion increases the predictive power of the model. A shortcoming that may make the gravity wrongly specified is the lack of multilateral resistance
terms, or the importance of relative trade costs in determining trade flows. We tackle
this problem with (exporter and importer) fixed effects and time fixed effects.
The next section provides an overview of troop deployment and military aid, and explains why they better reflect U.S. national security goals than strictly-based militarized
interstate disputes. One criticism of the flag-trade model concerns causality, i.e., whether
trade diminishes conflict or whether conflict diminishes trade. Before introducing our
empirical strategy, Section 3 explains why we do not expect the economic interdependence between he U.S. and the host/recipient countries to have an effect on U.S. troop
deployments or military aid. Section 4 presents the data, and discusses the empirical
strategy. Section 5 reports our main empirical results, while section 6 concludes.
2
Beyond MIDs: Troop deployment and Military Aid
Each year since 1950, the U.S. Department of Defense has provided on its web site detailed
information about the deployment of American troops around the world. The Heritage
foundation collected and analyzed the data (Kane, 2006). A thorough analysis of the
to indicate the beneficiary of military aid
3 This stands in sharp contrast to the few previous studies on U.S. deployment, which does not address the problem of endogeneity in this context, thus failing to provide robust evidence on the casual
mechanism (Biglaiser & DeRouen Jr, 2009; Jones & Kane, 2012).
Trade Still Follows the Flag: U.S. Security Strategy and the Value of Bilateral Trade 5
dataset shows how the U.S. military’s size and scope has changed over the past 60 years:
from its peak in 1969 as a conscripted force of 2.4 million troops, heavily overstretched
around the globe, to today’s all-volunteer force of only 1.4 million, concentrated in a
handful of countries. Broken down by geopolitical conflicts, this data reveals how different
administrations have approached crises. For instance, almost 750,000 U.S. troops were
dispatched in the East Asia and Pacific theater at the height of the Vietnam War, but
when America declared war on Iraq twenty years later, only about 70,000 troops were
deployed. While the U.S. contributed to the NATO-led operation in Kosovo in 1999
with no more than 13,500 troops in the immediate area, more than 200,000 troops were
deployed in the Middle East as part of Operation "‘Iraqi Freedom"’.
Troops sent to Korea in the early 1950s, to Vietnam during the 1960s and Iraq and
Afghanistan in the 2000s saw active combat, yet in most instances the U.S. military performed a variety of non-combat duties, from anti-piracy operations, to peacekeepin and
training with foreign militaries. On average, a stunning 22% of all U.S. Servicemen were
stationed in foreign countries during 1950-2005, most of them in non-combat duties. Almost every nation on earth, 181 out of 185, hosted American forces to some degree. In
the same period, 53 countries have hosted at least 1000 American troops at one point.
Some of these deployments have existed for nearly 50 years, as in Japan, Germany, and
South Korea, while other deployments have more recent origins such as the current deployment in Australia and around the Horn of Africa. The bulk of U.S. troops have
been concentrated in Europe (52% of troops deployed) and Asia (41%), while Africa and
Middle East have hosted a smaller share of troops. For the most part, U.S. troops were
stationed in allied countries, such as Japan, South Korea, and NATO members in the
Cold War system of deterrence to contain communism. Forces in Europe were reduced
by two-thirds after the fall of the Berlin Wall.
Grouping together the military personnel deployed in combat zones with the troops
hosted by allied countries, the data shows that the U.S. has deployed more forces abroad
and in more countries than any other military in the world history. Since the general
aim has been to confront perceived contemporary threats, we use the presence of troops
to proxy the foreign-policy goals of the country stationing troops. This measure is not
Trade Still Follows the Flag: U.S. Security Strategy and the Value of Bilateral Trade 6
new, since at least two other studies (Biglaiser & DeRouen Jr, 2007, 2009) use U.S.
troops as a proxy for the flag. Even if, much like MIDs, troop deployments were often
a response to acute crises (e.g. Panama, Kuwait), and thus conflict may surround the
placement of troops, most deployments evolved slowly and with mutual consent between
the U.S. and the host countries (e.g. Italy, South Korea). More recently, Australia has
agreed to host a full U.S. Marine task force. The deployment is being seen as a move
to counter China’s growing influence in the Pacific region. Therefore, troop deployments
reveal national interests that go beyond militarized disputes and may also reflect cordial
relations between countries. In either case, troops better reflect national security goals
than strictly conflict-based MIDs. Our question is whether the U.S. is more likely to trade
with economic regions over which it extended security guarantees.
Yet, accepting to host U.S. troops is a difficult political decision, which can cause
domestic backlash if the benefits are not clear-cut. The opposition can easily gather
domestic support against the U.S. "‘imperialistic ambitions"’ and the threats to national
sovereignty. To support the security needs of friends and allies and strengthen security
links, the U.S. can resort to alternative, less invasive, foreign policy tools. The U.S. is
the largest contributor of military aid to foreign countries in the world. Foreign miliary
aid could be thought as an effective substitute for costlier policies.
The U.S. Greenbook defines military aid as either loans or grants that are intended to
purchase U.S. weapons, direct military transfers, or training of the military personnel of
the recipient country.4 . The stated goal is to promote U.S. national security by contributing to regional and global stability, strengthening military support for democraticallyelected governments and containing transnational threats, including terrorism and trafficking in narcotics, weapons, and persons. These grants enable allies and friends to
improve their defense capabilities and foster closer military relationships between the
U.S. and recipient nations. According to the relevant literature on foreign military financing, this type of military aid can be effective in inducing states to adhere to U.S.
foreign policy objectives (Alesina & Dollar, 2000; Palmer & Morgan, 2010). In exchange
4 USAID Economic Analysis and Data Services (2012): US Overseas Loans and Grants, Obligations
and Loan Authorizations Greenbook (http://gbk.eads.usaidallnet.gov/)
Trade Still Follows the Flag: U.S. Security Strategy and the Value of Bilateral Trade 7
for military equipment or training, the USA could require recipient states to support U.S.
foreign policy (Meernik et al., 1998). Indeed, strategic and political priorities are shown
to be among the main drivers of the U.S. military aid decision-making process (Poe &
Meernik, 1995). Recent findings also suggest that while military aid may not be effective
at disarming terrorist groups, it can be effective at keeping terrorist groups out of power
(Bapat, 2011), thus reinforcing their place among the most persuasive tools of foreign
policy.
From 1946 to 2008, several types of aid were granted to states under this program,
from counter-narcotics assistance provided to Colombia to the provision of helicopters to
Pakistan’s military. During the Cold War, the U.S. used foreign aid to counter international threats by granting assistance to win or maintain allies and to help countries
fighting Soviet proxies. The reductions in aid disbursements in the former Eastern Bloc,
for example, were driven by the disappearance of a main motive, the containment of communism (Boschini & Olofsgård, 2007). Central American countries were also of particular
concern to U.S. foreign policy-makers during the 1980s, in part because of location, but
also owing to the perceived threat of increasing Cuban and Soviet influence in the region
(e.g. in Nicaragua). Another strategic-related variable links U.S. alliance commitments
to the allocation of military aid: NATO members are among the main recipients of this
form of assistance. The nature of the most visible recipient during the last decade (e.g.
Colombia, Egypt, Pakistan and Israel) demonstrates that political self-interest is among
the predominant considerations.
3
Does the flag follow the trade?
Establishing a close relationship between American flag concerns and bilateral trade leaves
open the question of whether troops/military aid cause trade or vice versa. It may be
helpful to first point out that, on a theoretical ground, there is no consensus on the
determinants of U.S. military intervention.
Liberals and constructivists claim that it is a response to human rights violations.
Drawing on the Kantian justification for humanitarian intervention which can be traced
Trade Still Follows the Flag: U.S. Security Strategy and the Value of Bilateral Trade 8
back to just war theory, liberals underscore the legitimacy of the use of military force
against countries where massive human rights violations are witnessed (e.g. Hoffmann
et al., 1996). According to constructivists, the norm of humanitarian intervention may
take precedence over the national interests of intervening states (e.g. Binder, 2009). Realists and marxists put forward national interests. In sharp contrast to the above arguments,
Marxists believe that human rights abuses serve as a convenient pretext for America’s
political propaganda and justification for military assaults toward the domestic affairs of
other sovereign countries 5 (Chomsky & Harris, 1999; Nardin, 2005). Realists instead cite
the struggle for power and the advancement of national interests as the real reasons for
military interventions since these practices may serve the agenda of the U.S. government
(see Morgenthau, 1966, among others). Some realist examples include the U.S interventions into Somalia and Haiti to discourage a massive flood of refugees; into Bosnia and
Kosovo to preserve NATO’s political credibility and avoid destabilizing Europe; and into
Iraq in 2003 to secure the oil supply (Newman, 2009). The U.S. may also dispatch its
armed forces without any obvious strategic or economic value, but simply to demonstrate
political credibility as a world leader (Finnemore, 2004). As such, the common problem with the prevailing and competing formulations is that interests are very difficult
to determine, and may vary on a case-by-case basis. This short overview can be easily
extended to the use of US military aid, which is regarded by policymakers and scholars as
an effective substitute for costlier change-seeking policies, such as military force (Bapat,
2011).
Regarding this potential source of endogeneity, we also address this issue by exploring
the data. Given the historical record, we believe that is unlikely that U.S. military
policymakers send troops or military aid to countries with high expected bilateral trade.
There is no record of an American president deploying troops based on the trade flow with
the destination, especially when troops are deployed to unstable areas with presumably
low potential for trade expansion. Hundreds of soldiers had been in Vietnam since the
end of World War II, but 1956 marked the beginning of new deployments into Cambodia
5 As Talentino (2005, p. 84) puts it, "‘[humanitarian] intervention is just another form of power
politics...the political corollary of the Washington consensus in economics, forcing countries to conform
to Western standards, for better or worse."’
Trade Still Follows the Flag: U.S. Security Strategy and the Value of Bilateral Trade 9
and Laos following regional crises. In particular, the war in Vietnam brought hundreds of
thousands of American military personnel to many countries in Southeast Asia. The U.S.
role in Korea was motivated by the sudden attack from North Korea, which ultimately
served to validate the strategy of containment of the communist ambitions. Only 510
servicemen were based in South Korea in 1950, prior to the attack. U.S. Department of
Defense (DOD) records show that 326,863 troops were deployed in South Korea in 1953,
a number that stabilized between 50,000 and 60,000 in the 1960s and 1970s (Kane, 2006).
This also holds for the U.S. presence in the Balkans in the 1990s, and Iraq and Afghanistan
today. Other foreign powers have deployed troops to unstable areas. Britain played a key
role in shaping the Middle East’s political landscape; she participated in the overthrow
of the Mosaddeq regime in Iran (1953) and, with France and Israel, opposed Egypt in
the Suez crisis (1956). Africa has been the scene of many foreign power interventions
since 1945, including: Britain, France, U.S., Belgium, Cuba and Russia. These were not
missions to ex-ante promising economies.
This argument holds true when we focus on host countries or aid recipients not at war.
For example, Afghanistan, Israel, Egypt, Iraq, Pakistan, Jordan and Colombia, which are
among the top recipients of military aid, are far from being main U.S. trading partners.
Each of those countries receive aid for different, yet interrelated, geostrategic reasons. For
example, Egypt’s $1.3 billion annual military aid package was aimed at making its army
a capable, professional force. The importance of Latin America counter-narcotics efforts
is also evident, with Bolivia, Peru, and more recently, Colombia, among the top U.S. aid
recipients. Plan Colombia, for example, which includes U.S. military/counter-narcotics
aid, was conceived between 1998 and 1999 by the administration of Pastrana with the
goals of ending the Colombian armed conflict and creating an anti-cocaine strategy.
Even if one focuses on the importance of Middle East oil to the global economy, that
is a rationale based on ex-ante resources as a basis for deployments (Jones & Kane, 2012),
not a story about trade flow. Moreover, the number of U.S. troops in Europe and Asia
dwarfs the scant troops stationed in the Middle East. During the second half of the
20th century, 52 percent of deployed troops were in Europe and 41 percent in Asia (see
Figure 3). Turkey is categorized as a Middle Eastern country and the basing of thousand
Trade Still Follows the Flag: U.S. Security Strategy and the Value of Bilateral Trade 10
Figure 1: U.S. Troop Deployments by Region. Calculations by Kane (2006), The Heritage
Foundation, based on annual records from Department of Defense, DIOR.
American troops on its soil has to do with Turkey’s close friendship with the U.S. and
its NATO membership . There are obviously notable exceptions: Germany and Japan
are among the largest trading partners of the United States and are the top two host
countries. However, in postwar Germany, the goal of the U.S. presence was Cold War
peace through deterrent strength. One can argue that the mission was largely successful,
not only for the U.S., but also for the economic development of the country. What started
as a blatant occupation of Japan after 1945 was lately transformed by the need to contain
China and the Soviet Union into a strong security alliance. Other postwar relationships
also evolved into long-standing mutually beneficial alliances involving heavy U.S. troop
commitments, such as in the Philippines and Taiwan (Kane, 2006). Hence, while the
presence of troops could have boosted the level of bilateral trade in the long run, it is
hard to argue in favour of the reverse relation.
Any suspect about a possible trade to flag dynamic obviously accentuates the problem
of endogeneity. In the next section we address the endogeneity issues by controlling for
co-determinants of flag and trade; by including fixed effects and time effects; and, finally,
Trade Still Follows the Flag: U.S. Security Strategy and the Value of Bilateral Trade 11
by implementing an instrumental variable strategy.
4
Methodology and data
4.1
The log of gravity augmented
The gravity model has long been one of the most successful empirical models in economics
to analyze trade patterns between states. The traditional gravity model drew on analogy
with Newton’s Law of Gravitation. A mass of goods or labor or other factors of production
supplied at origin i, Ai , is attracted to a mass of demand for goods or labor at destination
j, Bj , but the potential flow is reduced by the distance between them, di j. Strictly
applying the analogy, Ti j = AiBj/d2ij gives the predicted trade flow between i and j, Ti j
. Tinbergen (1963) is the first application of the gravity to trade flows. The intuition is
straightforward: large countries have large trade volumes, and neighbors trade more than
non-neighbors. Indeed, gravity orders remarkably well the enormous observed variation
in economic interaction across space in both trade and factor movements. The predictive
power of the gravity model of trade is outstanding: by knowing the size of two countries’
economies and the distance between them, we can predict 60% of the variance in the
volume of trade (Hegre, 2009).
The good fit and relatively tight clustering of the coefficients in the vast empirical
literature suggested that underlying economic laws are at work. However, given that
potentially each sale has multiple possible destinations and each purchase has multiple
possible origins, a theory of the bilateral flows must account for the relative attractiveness
of origin-destination pairs. Thus, bilateral sale cannot be reduced to a mere "‘remoteness
calculation"’. Indeed, the fit of traditional gravity improves when supplemented with
proxies for trade frictions, such as the effect of political borders and common language
(Anderson, 2010, provides an excellent review of the theoretical and empirical issues
behind the gravity model). Yet, common sense tells us that the diplomatic, strategic and
military relationship between countries should also be among the strongest predictors of
the trade flow. Political factors along with economic conditions encourage countries to
trade with each other.
Trade Still Follows the Flag: U.S. Security Strategy and the Value of Bilateral Trade 12
The effect of flag on bilateral trade is estimated using the conventional gravity model
of international trade. The formulation we use is the benchmark empirical model for this
kind of exercise, and the specification can be derived formally from a general equilibrium
model of production, consumption, and trade, as in Anderson & Van Wincoop (2003).
For empirical purposes, we model the bilateral level of trade as a function of the log
distance between them, the log of the product of their GDPs, and other control variables,
as well as the current and lagged measure of flag. Our set of control variables include the
standard determinants of trade as used in the gravity equation literature, following Glick
& Taylor (2010), but is not meant to be exhaustive. We include dyad variables invariant in
time as geographic proximity (Log distance, contiguity) and historical linkages (common
language, ex-colony). We also control for several characteristics of the host/recipient
country (GDP, population, GDP per capita). Finally, following Tomz et al. (2007), we
include the participation in Free Trade Agreements because they are conceptualized to
create opportunities for trade.6 The baseline model is specified as follows:
ln zit = µi + µt + λ ln f lagit + βXit + it
(1)
where i denotes the host/recipient country (i.e. hosting troops and/or aid), t denotes
time, and the variables are defined as:
• ln yit is the log of real value of bilateral trade between country i and the U.S. at
time t;
• ln f lagit is log of troops deployed by the U.S. in country i at time t or is the log
of grants and loans provided by the U.S. to help country i purchase weapons and
defense equipment;
• matrix Xit includes ln Yit , the log of real GDP of country i;ln Y pcit , the log of
real per capita GDP of country i; ln P opi , the log of population of country i;
ln Remotenessit , the log of relative distance calculated as the (log of) GDP-weighted
average distance to all other countries (Wei, 1996); ln Dist, the log of (great circle)
6 Free trade areas (FTAs) are arrangements among two or more countries under which they agree to
eliminate tariffs and nontariff barriers on trade in goods among themselves.
Trade Still Follows the Flag: U.S. Security Strategy and the Value of Bilateral Trade 13
distance between Washington and the capital city of i;Lang, a binary variable that
is unity if i is an English-speaking country; Border, a binary variable that is unity
for Mexico and Canada; F T A, a binary variable that is unity when the U.S. has a
Free Trade Agreement with country i; and Col, a binary variable taking value one
if the country i is in a colonial relationship.
• µi are country fixed effects;
• µt are time fixed effects.
β and λ are coefficients and it represents the other influences on bilateral trade,
assumed to be well behaved.
The coefficient of main interest is λ, which has not been studied before. In fact, in
what will follow, all the other coefficients take on typical values that are consistent with
the large empirical gravity literature.
Most studies use pooled, rather than panel estimators that may not adequately control
for omitted country- or pair-specific attributes or distinguish between the effects of flag on
trade across country pairs and the effects over time. We use a gravity model with panel
data using country fixed effects, so that our identification of flag’s impact depends on the
time and panel dimension with full control for any time-invariant country characteristic.
Another reason that potentially makes the gravity not correctly specified is the fact that
it does not take into account multilateral resistance terms (Anderson & Van Wincoop,
2003). One of the solutions for this problem that is suggested by those authors is indeed
to augment the traditional gravity equation with (exporter and importer) fixed effects.
4.2
Endogeneity
The estimates of our main coefficients of interest, λ, in equation 1, are potentially contaminated by two sources of endogeneity, which we now discuss.
Omitted variable bias
In equation 1, the coefficients of flag could be affected by omitted co-determinants of
economic gains i.e. trade. Indeed, several determinants of bilateral trade (or conversely
Trade Still Follows the Flag: U.S. Security Strategy and the Value of Bilateral Trade 14
trade barriers) might also affect the bilateral political affinity and consequently the political costs of troop deployment or military aid. An upward bias of the coefficient λ in
the customary gravity equation may come for instance from the fact that some countries
(because of cultural, historical, or other reasons that we cannot fully control for) have
good bilateral relations with the U.S. while also having large trade flows. We control
for such country pair fixed effects by exploiting the panel dimension of our data set.
Analogously, peacekeeping and humanitarian concerns while positively affecting the distribution of U.S. armed forces abroad, may not be correlated with trade at all. This poses
an issue of downward bias. A downward bias might also arise from technological changes
in the security production function; higher capital productivity implies lower levels of
manpower, assuming a constant level of security provision. Finally, unobservable U.S.
foreign policies may affect the choice of the area of the world in which to deploy troops
or direct financial aids with the expectation of generating future trade opportunities.
We address this issue by using a more general model where the effect of military
intervention and military aid varies across quartiles. Our strategy exploits the changes in
the US security strategy over more than 50 years to identify the effect of flag on trade.7
Variations in the global U.S. security strategy over time are unlikely to be correlated with
other observed and unobserved region’s attributes affecting bilateral trade flows.
Since we do not observe the US foreign policy aims, we attempts to proxy this unobserved characteristic by using troop quartile dummies. So we rewrite the model in
equation 1 as follows:
ln zcrqt = µr + µq + µt + λq ln f lagcrgt + βq Xcrqt + εcrqt
(2)
where c denotes country, r represents region, q stands for quartile and t denotes time.
After aggregating equation (2) across countries, we obtain the following specification:
ln z rqt = µr + µq + µt + λq ln f lag rgt + βq X rqt + εrqt
(3)
7 A similar strategy has been successfully implemented in Acemoglu & Pischke (2001) to assess the
effects of family income on enrollments
Trade Still Follows the Flag: U.S. Security Strategy and the Value of Bilateral Trade 15
where ln z rqt is the log average bilateral trade in region r, quartile q and time t, and
ln f lag rgt is the log average flag measure in region r, quartile q and time t.
Equation 3 controls for time, region and quartile fixed effects. The time captures the
effects of aggregate conditions like changes in U.S. presidency while the quartile fixed
effects purge the correlation between the flag and the errors due to unobserved foreign
policy, so that λq is correctly identified.
Note that the estimation of Equation 2 can be thought of as instrumental variables (IV)
estimation of the original equation using the full set of quartile-region-time interactions
as the instruments for the flag. This IV interpretation makes our empirical strategy
innovative. Troop deployment or military aid is likely to vary with political or other
unobservable affinities between the US and the host/recipient country i. As we said, these
factors may be correlated with the attitude of trading with i, so that flag is correlated
with the error term in Equation 1. Our strategy avoids this important source of bias,
because we are controlling for i’s rank in the regional troop/aid distribution, which is
close to a sufficient statistic for its unobservable characteristics. We identify λq from
the variations in the "‘level of flag"’ conditional on this rank. The approach is based on
the evidence that the decrease in troops over time has been more marked in countries
belonging to the upper quartile of the distribution compared to the countries in the lower
quartile.
Table 5 shows descriptive statistics of bilateral trade and troops deployment. For the
sake of readability the figures are calculated by decade and troop quartile, while Equation
2 is estimated by using yearly variations in the level of flag. The table 5 suggests that
trade flows increased relatively more with countries belonging to the 3th and 4th quartile
of the distribution of overseas troop, while increased less at the bottom quartile. The
second panel in the table shows that troop deployment has fallen by half for countries
belonging to the 1st quartile, less for the middle two quartiles and has dropped even less
for countries in the top quartile. A very similar pattern emerges by lurking behind Table
6, which reports means of military aid by decade and aid quartile. These patterns are
consistent with substantial flag effects on trade in the aggregate.
Table 7 and 8 report the mean of troop deployment and military aid disaggregated by
Trade Still Follows the Flag: U.S. Security Strategy and the Value of Bilateral Trade 16
region and decade. Interestingly, they reveal a substantial variation in the value taken by
our variables across the six world regions. Even though bilateral trade has risen steadily
with all the six regions, the largest increase has occurred with the NANESA region (i.e.
North Africa, Near East and South Asia), the EAP (i.e. East Asia and Pacific) and
Sub-Saharan Africa, while troop and military aid has fallen less than in other regions.
The number of troops deployed has decreased mostly in line after the end of the Cold
War but there are important heterogeneity across regions in the 1990s. This illustrates
that the regional variation is helpful in identifying our models. Therefore, in addition to
using variations in the level of flag over time, our estimation strategy also exploits the fact
that flag differentials have changed differently in different regions. By relying completely
on within region variations we can control for the interactions of time and flag groups
at the aggregate level in the trade equation. This allows us to also estimate a model
that control for other (unobservable) factors which might have affected host/recipient
countries differently, like heterogeneous levels of conflict in the region of interest.
Reverse Causality
A positive correlation between bilateral trade openness and the probability of hosting
U.S. troops or being the recipient of military aid can arise from causality running both
ways. Note that, as we stressed in section 3, the issue of reverse causality in our context
is not obvious and should be ultimately ruled out. If anything, when troops are deployed
into actual combat zones, or aid is allocated to war-torn regions, flag would likely have
the opposite effect on trade. In order to eliminate this issue we look at the measures
of flag before a given trade flow actually takes place: we take up to 5-year lag for the
number of troops deployed and the size of military aid in order to limit contemporaneous
reverse causality. Moreover, the model is estimated with a number of techniques to test
robustness.
Trade Still Follows the Flag: U.S. Security Strategy and the Value of Bilateral Trade 17
5
Results
We start with the regressions which do not control for quartile effects. This is equivalent
to estimating flag on trade without instrumenting for flag. The coefficients of troop
deployment and military aid in these models therefore captures both the effect of flag and
any other effect of country i background which is correlated with the flag. Our estimation
results for a traditional gravity equation are presented in Table 1 and 2, where flag is
measured by troop deployments and military aid respectively. Column 1 in Table 1 is the
customary gravity equation estimated by OLS in the pooled sample. Column 2 allows for
differential growth in the level of trade across time and regions, i.e. controlling for time
and region fixed effects. Column 3 adds time-region interactions. Finally, Column 4 takes
into account host country-specific time invariant fixed effect as well as time effect. The
time invariant covariates unfortunately cannot be identified. The model proves successful
on almost all the classical dimensions and fits the data well. The added control variables
are economically and statistically significant with sensible interpretations. For instance,
economically larger and richer countries trade more with the U.S. A common language
encourages trade, as does a common, ongoing Free Trade Agreement. FTAs can be
interpreted as a way to reinforce bilateral economic relations. Canada and Mexico, that
share territorial boundaries with the U.S., engage in higher levels of trade with the U.S.
because transportation costs should be less. The key variable of interest in Table 1 is the
estimates of troop deployment. The size of the coefficient and the level of significance of
the troop deployment provides encouraging empirical support to our flag-driven theory
of trade.
The same empirical strategy applies to table 2, where the coefficient of military aid
achieves statistical significance only when country-specific time invariant fixed effect and
the time effect are included.
One possible concern is whether the results would be robust if we controlled for the
possibility of reverse causality. We deal with the simultaneous determination of trade
and flag in Table 3 and 4, estimating models as in column 4 of Tables 1 and 2 with the
addition of up to 5 lags of the flag variable. We find that our method is robust when
Trade Still Follows the Flag: U.S. Security Strategy and the Value of Bilateral Trade 18
troop deployment is used as proxy of flag, while military aid fails to achieve statistical
significance across our different model specifications. The first and second lag of troop
deployment show a positive and statistically significance effect on U.S. trade flows, but
smaller in magnitude when compared to the concurrent effect found in column 4 of Table
1. This result is expected because the trade benefits from flag do not necessarily fade
away with the passage of time. Controlling for further lags does not add any statistically
relevant information. Finally, column 6 shows the estimates of the gravity equation when
all five-year lags are used. The first lag of troops deployment still shows a statistically
significance effect. The strong collinearity between the lagged variables reduces the significance of the flag. Overall, the coefficients for the lagged number of troops, shown in
Table 3, suggest that our findings of a positive effect of flag on trade in Table 1 are not
driven by the simultaneity bias we have discussed above.
To deal with the main technical concern, the possibility of omitted variable bias, we
estimate Eq. 3 with no controls for quartile effects in Table 9 and 11 and controlling for
quartile effects in Table 10 and 12, using troop deployment and military aid respectively.
We estimate several specifications whose main difference lies in the number of fixed effects
and their interactions. Most of the explanatory variables of trade exhibit the correct sign
and are statistically significant, in line with the previous tables and mainstream gravity
models. Our augmented gravity model correctly predicts a positive coefficient for the
GDP variables and a negative coefficient for the distance variable. Notice that the log of
relative distance is captured by the remoteness variable, calculated as the (log of) GDPweighted average distance to all other countries. Both general ways to proxy the flag have
a positive and highly significant impact on trade levels across all models. Therefore, troop
deployments and military aid are strong and significant determinants of trade flows.
When we control for quartile fixed effects the sizes of the coefficient of troop and aid
is larger than their OLS counterpart, suggesting a downward bias in the OLS regressions.
This means that our strategy is able to purge the correlation between the unobserved
factors, the flag and trade variables. Most of the previous literature raises concerns about
omitted-variable bias: if the gravity model is correlated with both trade and flag (e.g.
conflict), it is necessary to control for the nature of this bias. We find that a correct
Trade Still Follows the Flag: U.S. Security Strategy and the Value of Bilateral Trade 19
model specification leads to a stronger relationship between trade and flag than in the
traditional models.
Political factors along with economic conditions are most critical for understanding
what encourages countries to trade with the U.S. From a political standpoint, our results
strongly suggest that an increase in the number of U.S. troops in a country, or similarly
an increment in the amount of military financing, provides a signal of positive relations
and stability that promotes increased trade dependence.
6
Conclusions
Our results suggest that we are right to advance the relevance of political motivations
behind bilateral trade; security concerns affect trade flows between countries. We use nuanced measures of flag, U.S. troop deployments and foreign military financing, in sharp
contrast to previous studies on this matter, which proxy the flag using militarized interstate disputes (MIDs). In our view, the strategic, geopolitical relevance of a country extends beyond issues of MIDs. Although troops may be brought in during highly
unstable situations, troops are also stationed abroad during peaceful times. Frequent
deployments and joint military exercises during peacetime in the past in Italy, Germany,
Morocco, Thailand, and currently in Egypt, Panama, Saudi Arabia, Singapore, South
Korea, Turkey, and the United Arab Emirates indicate positive relations between the
U.S. and host countries. Similarly, the vast majority of unclassified military aid and
assistance goes to allies and friends, such as Israel, Egypt, Turkey and Greece. Iraq
received assistance for reconstruction activities while the importance of Latin America
counter-narcotics efforts is also evident, with Bolivia, Peru, and more recently, Colombia,
among the top U.S. aid recipients. The impact of the terrorist attacks on September 11,
2001, and the subsequent use of foreign aid to support the war on terrorism is clearly
seen in the country-aid allocations to Afghanistan, Pakistan, Jordan and Indonesia, key
partners in the war on terrorism. Finally, and perhaps most importantly, we hope to have
demonstrated by using a novel estimation of the gravity model which can be thought of
as an instrumental variables (IV) estimation, that our results are both theoretically and
Trade Still Follows the Flag: U.S. Security Strategy and the Value of Bilateral Trade 20
methodologically robust.
Previous multivariate studies focusing on generally on flag and trade (whether flag
was measured by MIDs or other ad-hoc variables) recognized the endogeneity of the flag
but did little to take into account the omitted variable bias that might arise as a result of
the exclusion of unobservable factors explaining both trade flows and security concerns.
We believe our adoption of a methodology that controls this source of endogeneity
has allowed us to demonstrate the underlying link between international politics and
international economics: security concerns affect the size of bilateral trade flows between
the U.S. and the rest of the World. Further investigation is required to account for the
results; nevertheless, we put forward some plausible explanations that account for the
strong patterns elicited in the regression analysis. Scholars can and should endeavor to
open the ’black box’ of flag and look at domestic and governmental characteristics as well
as the international environmental factors that influence trade flows as a starting point
to predict future trends.
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Trade Still Follows the Flag: U.S. Security Strategy and the Value of Bilateral Trade 24
Table 1: Gravity estimates of US bilateral trade. Flag is Troop Deployment
i
ii
iii
iv
ln troop
0.025***
0.016**
0.018**
0.073***
(0.008)
(0.007)
(0.007)
(0.021)
ln Y
0.892***
0.845***
0.781***
1.209***
(0.025)
(0.122)
(0.129)
(0.203)
ln Y pc
0.283***
0.463***
0.503***
-0.001
(0.033)
(0.117)
(0.123)
(0.213)
ln P op
-0.027
0.030
0.090
-1.029***
(0.027)
(0.121)
(0.128)
(0.248)
FTA
0.981***
0.899***
0.899***
0.628***
(0.064)
(0.068)
(0.075)
(0.202)
Border
0.395***
0.060
0.032
(0.102)
(0.125)
(0.127)
ln Dist
-0.528*** -0.460*** -0.494***
(0.051)
(0.074)
(0.073)
Lang
0.507***
0.358***
0.370***
(0.030)
(0.033)
(0.034)
Col
1.295***
0.816***
0.831***
(0.067)
(0.071)
(0.087)
Country effects
no
no
no
yes
Region effects
no
yes
yes
no
Time effects
no
yes
yes
yes
Region × time effect
no
no
yes
no
N
5223
5223
5223
5223
Robust standard errors in parentheses
* p < 0.10, ** p < 0.05, *** p < 0.01
Trade Still Follows the Flag: U.S. Security Strategy and the Value of Bilateral Trade 25
Table 2: Gravity estimates of US bilateral trade. Flag is Military Aid
i
ii
iii
iv
ln Aid
0.009
0.007
0.004
0.018*
(0.006)
(0.006)
(0.006)
(0.010)
ln Y
0.879***
0.157
0.135
0.978***
(0.027)
(0.158)
(0.166)
(0.334)
ln Y pc
0.318***
1.183***
1.194***
0.109
(0.034)
(0.152)
(0.160)
(0.367)
ln P op
0.036
0.790***
0.814***
-0.688*
(0.030)
(0.157)
(0.165)
(0.391)
FTA
1.061***
1.040***
0.954*** 0.762***
(0.077)
(0.079)
(0.081)
(0.241)
Border
0.036
-0.436*** -0.383***
(0.086)
(0.081)
(0.084)
ln Dist
-0.866*** -0.808*** -0.813***
(0.035)
(0.042)
(0.042)
Lang
0.453***
0.343***
0.343***
(0.037)
(0.039)
(0.040)
Col
1.579***
0.668***
0.649***
(0.063)
(0.079)
(0.092)
Country effects
no
no
no
yes
Region effects
no
yes
yes
no
Time effects
no
yes
yes
yes
Region × time effect
no
no
yes
no
N
3600
3600
3600
3600
Roust standard errors in parentheses
* p < 0.10, ** p < 0.05, *** p < 0.01
Trade Still Follows the Flag: U.S. Security Strategy and the Value of Bilateral Trade 26
Table 3: Fixed effect gravity estimates of US bilateral trade. Flag is Troop Deployment
i
ii
iii
iv
v
vi
ln troopt−1
0.061***
0.049***
(0.021)
(0.015)
ln troopt−2
0.045**
0.011
(0.021)
(0.010)
ln troopt−3
0.028
-0.011
(0.020)
(0.011)
ln troopt−4
0.021
-0.009
(0.019)
(0.009)
ln troopt−5
0.017
0.007
(0.019)
(0.010)
ln Y
1.222***
1.207***
1.173***
1.115***
1.044***
1.189***
(0.202)
(0.210)
(0.213)
(0.218)
(0.220)
(0.197)
ln Y pc
0.006
0.045
0.114
0.161
0.216
0.014
(0.214)
(0.224)
(0.229)
(0.232)
(0.235)
(0.207)
ln P op
-0.987*** -0.945*** -0.891*** -0.843*** -0.807*** -0.987***
(0.254)
(0.265)
(0.275)
(0.282)
(0.287)
(0.267)
FTA
0.602***
0.583***
0.573**
0.573**
0.582**
0.579***
(0.206)
(0.213)
(0.220)
(0.224)
(0.225)
(0.214)
Time effects
yes
yes
yes
yes
yes
yes
Country effects
yes
yes
yes
yes
yes
yes
N
5111
5001
4897
4794
4679
4447
Robust standard errors in parentheses
* p < 0.10, ** p < 0.05, *** p < 0.01
Trade Still Follows the Flag: U.S. Security Strategy and the Value of Bilateral Trade 27
Table 4: Fixed effect gravity estimates of US bilateral trade. Flag is Military Aid
i
ii
iii
iv
v
vi
ln Aidt−1
0.013
0.008
(0.010)
(0.009)
ln Aidt−2
0.006
-0.002
(0.010)
(0.006)
ln Aidt−3
-0.001
-0.002
(0.010)
(0.006)
ln Aidt−4
-0.011
-0.007
(0.011)
(0.006)
lln Aidt−5
-0.010
-0.003
(0.011)
(0.011)
ln Y
0.917*** 0.955*** 1.131*** 1.343*** 1.422*** 1.161***
(0.328)
(0.326)
(0.267)
(0.256)
(0.252)
(0.276)
ln Y pc
0.194
0.189
0.026
-0.140
-0.226
0.073
(0.364)
(0.370)
(0.306)
(0.281)
(0.276)
(0.292)
ln P op
-0.562
-0.489
-0.519
-0.572*
-0.671**
-0.298
(0.385)
(0.383)
(0.350)
(0.340)
(0.335)
(0.342)
FTA
0.749*** 0.737*** 0.708*** 0.696**
0.682**
0.708**
(0.244)
(0.251)
(0.258)
(0.268)
(0.272)
(0.284)
Time effects
yes
yes
yes
yes
yes
yes
Country effects
yes
yes
yes
yes
yes
yes
N
3500
3399
3293
3185
3091
2632
Robust standard errors in parentheses
* p < 0.10, ** p < 0.05, *** p < 0.01
Table 5: Mean of bilateral trade and troop deployment by decade and troops quartile.
Military troop quartile
Decade
1
2
3
4
Bilateral trade (logs)
1950s
1960s
1970s
1980s
1990s
2000s
4.04
4.00
5.21
5.70
5.80
6.70
5.14
5.45
6.54
7.20
7.05
7.63
5.47
5.80
6.95
7.70
8.80
9.07
5.55
5.92
7.20
8.33
8.31
8.80
3.37
3.25
3.00
2.70
2.41
2.38
5.24
5.08
4.33
3.55
3.46
3.34
9.32
9.27
8.95
8.80
8.26
8.03
Troop deployment (logs)
1950s
1960s
1970s
1980s
1990s
2000s
2.26
2.00
2.08
1.57
1.32
1.40
Trade Still Follows the Flag: U.S. Security Strategy and the Value of Bilateral Trade 28
Table 6: Mean of bilateral trade and military aid by decade and aid quartile.
Military aid quartile
Decade
1
2
3
4
Bilateral trade (logs)
1950s
1960s
1970s
1980s
1990s
2000s
5.00
4.82
6.08
6.50
7.12
8.28
5.06
5.07
6.00
6.51
6.89
7.58
5.50
5.42
5.83
7.00
7.13
7.36
5.43
5.74
7.12
8.30
8.31
8.71
14.95
12.78
12.00
11.01
11.54
11.56
17.77
15.73
14.98
12.42
12.95
13.71
19.15
17.56
17.36
15.18
14.25
15.30
20.73
19.55
19.65
18.65
17.50
17.70
Military Aid (logs)
1950s
1960s
1970s
1980s
1990s
2000s
Table 7: Mean of bilateral trade and troop deployment by decade and regions.
World region
Decade
EAP Europe FSU NANESA SSAfrica Latin America
Bilateral trade (logs)
1950s
1960s
1970s
1980s
1990s
2000s
5.11
5.53
7.07
8.00
8.21
9.27
5.21
5.67
6.96
7.85
8.35
8.91
5.47
5.91
4.32
4.80
5.73
6.93
7.34
8.03
3.71
4.23
5.52
5.86
6.15
6.57
6.07
6.25
7.23
7.72
8.40
9.11
1.52
2.15
4.69
4.93
4.42
3.84
3.71
3.98
4.84
4.26
3.41
2.62
3.00
2.91
4.97
4.74
4.40
3.93
3.70
3.20
Troop deployment (logs)
1950s
1960s
1970s
1980s
1990s
2000s
5.38
5.50
5.26
4.50
4.32
4.25
5.32
5.21
4.92
4.62
4.28
4.12
Trade Still Follows the Flag: U.S. Security Strategy and the Value of Bilateral Trade 29
Table 8: Mean of bilateral trade and military aid by decade and regions.
World region
Decade
EAP Europe FSU NANESA SSAfrica Latin America
Bilateral trade (logs)
1950s
1960s
1970s
1980s
1990s
2000s
5.48
6.08
7.45
7.87
9.30
8.51
5.44
6.04
6.77
7.92
7.62
8.84
17.97
17.68
18.50
14.42
13.66
14.56
18.98
16.29
15.55
15.16
14.15
14.62
5.03
5.71
4.39
4.60
5.81
6.88
7.62
8.40
4.08
3.69
4.85
5.36
5.75
6.37
6.41
6.33
7.27
8.08
8.57
9.74
13.72
14.71
18.71
16.46
16.47
15.12
14.93
15.29
16.08
15.45
15.18
13.63
13.57
14.40
16.86
16.45
15.51
14.00
14.00
14.67
Military aid (logs)
1950s
1960s
1970s
1980s
1990s
2000s
Table 9: Fixed effects regressions for US bilateral trade. No controls for troop deployment
quartiles.
i
ii
iii
ln troop
0.017*
0.022**
0.018*
(0.009)
(0.009)
(0.009)
ln Y
1.276***
1.228***
1.246***
(0.032)
(0.032)
(0.036)
ln P op
-0.371*** -0.334*** -0.339***
(0.028)
(0.029)
(0.031)
ln Remoteness
-0.037
-0.302*** -0.340***
(0.029)
(0.054)
(0.062)
Region effects
yes
yes
yes
Time effects
no
yes
yes
Region × Time effects
no
no
yes
N
1068
1068
1068
Standard errors in parentheses
* p < 0.10, ** p < 0.05, *** p < 0.01
Trade Still Follows the Flag: U.S. Security Strategy and the Value of Bilateral Trade 30
Table 10: Fixed effects regressions for US bilateral trade controlling for troop deployment
quartiles.
i
ii
iii
v
iv
ln troop
0.006
0.067**
0.068**
0.077*
0.066
(0.026)
(0.028)
(0.031)
(0.040)
(0.051)
ln Y
1.272***
1.222***
1.242***
1.144***
1.172***
(0.032)
(0.033)
(0.036)
(0.037)
(0.044)
ln P op
-0.370*** -0.351*** -0.355*** -0.321*** -0.326***
(0.030)
(0.030)
(0.033)
(0.031)
(0.036)
ln Remoteness
-0.038
-0.318*** -0.368***
-0.036
-0.162**
(0.030)
(0.054)
(0.064)
(0.069)
(0.082)
Quartile effects
yes
yes
yes
yes
yes
Region effects
yes
yes
yes
yes
yes
Time effects
no
yes
yes
yes
yes
Region × Time effects
no
no
yes
yes
yes
Quartile × Region effects
no
no
no
yes
yes
Quartile × Time effects
no
no
no
no
yes
N
1068
1068
1068
1068
1068
Standard errors in parentheses
* p < 0.10, ** p < 0.05, *** p < 0.01
Table 11: Fixed effects regressions for US bilateral trade. No
quartiles.
i
ii
ln Aid
0.037***
0.031***
(0.007)
(0.008)
ln Y
1.391***
1.406***
(0.037)
(0.039)
ln P op
-0.573*** -0.586***
(0.036)
(0.040)
ln Remoteness
-0.149*** -0.165**
(0.034)
(0.070)
Region effects
yes
yes
Time effects
no
yes
Region × Time effects
no
no
N
933
933
Standard errors in parentheses
* p < 0.10, ** p < 0.05, *** p < 0.01
controls for military aid
iii
0.036***
(0.008)
1.459***
(0.045)
-0.621***
(0.045)
-0.233***
(0.089)
yes
yes
yes
933
Trade Still Follows the Flag: U.S. Security Strategy and the Value of Bilateral Trade 31
Table 12: Fixed effects regressions for
quartiles.
i
ln aid
0.087***
(0.016)
ln Y
1.399***
(0.038)
ln P op
-0.574***
(0.037)
ln Remoteness
-0.108***
(0.036)
Quartile effects
yes
Region effects
yes
Time effects
no
Region × Time effects
no
Quartile × Region effects
no
Quartile × Time effects
no
N
933
Standard errors in parentheses
* p < 0.10, ** p < 0.05, *** p < 0.01
US bilateral trade controlling for military aid
ii
0.073***
(0.020)
1.403***
(0.041)
-0.576***
(0.040)
-0.163**
(0.071)
yes
yes
yes
no
no
no
933
iii
0.068***
(0.023)
1.461***
(0.046)
-0.614***
(0.045)
-0.236**
(0.091)
yes
yes
yes
yes
no
no
933
v
0.126***
(0.026)
1.448***
(0.046)
-0.598***
(0.048)
-0.243***
(0.091)
yes
yes
yes
yes
yes
no
933
iv
0.071*
(0.042)
1.456***
(0.052)
-0.605***
(0.055)
-0.341***
(0.105)
yes
yes
yes
yes
yes
yes
933