Conflict and Commerce: New Data about the Great War
Joanne Gowa
Raymond Hicks
Princeton University
Princeton University
[email protected]
[email protected]
October 8, 2012
Preliminary draft. Please do not cite or circulate.
1
Conflict and Commerce: New Data about the Great War
Abstract
The First World War is often cited as proof par excellence of the flaws in the liberalpeace argument, because it engaged on opposite sides states that had been each other’s major
prewar trading partners. It is also commonly assumed to have wreaked havoc on world trade.
Yet, its effects have rarely been rigorously examined. Using an original data set, we show that
the Great War eroded trade across enemy lines. It also, however, induced offsetting changes
elsewhere: new trade channels opened, existing channels were used more intensively, and states
reallocated their domestic resources to produce at home goods they had previously obtained
abroad. The neglect of substitution in the existing literature implies a bias in existing estimates
of the impact of conflict on trade and of the deterrent power of trade.
2
Conflict and Commerce: New Data about the Great War
The relationship between politics and trade has long intrigued students of international
relations. An ever expanding body of work examines the impact on trade of varied political
institutions, including preferential trade agreements (PTAs) (e.g., Mansfield and Bronson 1997;
Manger 2005; Solingen 2008; Mansfield and Milner 2012), alliances (e.g., Gowa and Mansfield
1993; Gowa 1994; Morrow, Siverson, and Tabares 1998, 1999; Long and Leeds 2006), and
bilateral investment treaties (BITs) (e.g., Egger 2004; Guzman 2006; Kerner 2009). But by far
the largest share of the existing literature examines the relationship between trade and conflict.
Almost all studies about trade and conflict analyze the years after 1945, reflecting the
dearth of readily available information about trade flows earlier in the twentieth century. 1 The
postwar era, however, witnesses no titanic clashes of the kind that erupted twice between the
great powers before the onset of the Cold War. Indeed, the percentage of dyad years in which
Militarized Interstate Disputes (MIDs) engage two minor powers is almost twice as high after
1945 as it is between 1900 and 1950. 2 Yet, small states are rarely each other’s or any other
country’s principal trading partners. As such, their conflicts are unlikely to exert strong effects
on trade. For the same reason, trade is unlikely to exert a strong deterrent effect on conflict. An
attenuation bias in existing estimates seems inevitable.
Because it engaged on opposite sides states that had been each other’s major trading
partners, the Great War has acquired a paradigmatic status in the literature. It is often cited as
proof par excellence of the flaws in the liberal peace argument—that is, the argument that
1
Exceptions include Mansfield (1994); Morrow, Siverson, and Tabares (1998, 1999); and
Barbieri (2006).
2
http://www.correlatesofwar.org/datasets.htm
1
increasing trade between states reduces the probability of conflict between them. It is also seen
as casting doubt on Norman Angell’s claim that war had become a “great illusion,” because it
would destroy the trade that had become central to national power (1909). Yet, rigorous
analyses of the Great War’s effects on trade are rare. 3 We examine them using a new data set on
bilateral trade flows between 1900 and 1929.
The First World War occurred in an era in which steep falls in transport costs had
allowed the entry into trade of the primary products and manufactured goods that were staples of
everyday existence. The war brought the first “golden age of globalization” to an abrupt end,
making it the first case of a conflict that had the potential to wreak widespread havoc on the trade
that had become central to domestic patterns of production and consumption (Findlay and
O’Rourke 2007, xxiv). Fortuitously for social science, the early decades of the twentieth century
also witness many states entering and exiting conflicts. This allows us to use a panel-data
analysis rather than the time-series cross-sectional analyses that dominate the literature. To the
best of our knowledge, this is the first analysis of conflict and trade to include the country-year
fixed effects that the theoretical literature about empirical trade models recommends.
We find that the cut in trade across enemy lines was only one among several trade-related
consequences of the war. Its outbreak precipitated widespread substitution, as countries sought
imports from states other than their prewar trading partners. Trade between members of each
wartime coalition rose as trade across them fell. Trade between the northern European neutrals
and the Central Powers increased sharply, despite the Royal Naval blockade and the U.S. entry
into the war. Both before and after it became an “associated power,” the United States stepped
into the breach created by the war, exploiting shortfalls in European exports to increase its own.
3
An exception is Glick and Taylor (2010), which we discuss below.
2
These findings suggest that the lessons of the Great War have been misinterpreted. The
ubiquity of substitution undermines not only the liberal-peace argument but also the existing
theoretical and empirical literature about the relationship between trade and conflict. Although
several studies emphasize the importance of substitutability (e.g., Polachek 1980; Polachek and
McDonald 1992; Reuveny and Kang 1998; Dorussen 2006; Li and Reuveny 2011), they do not
analyze the role third-party markets can play. 4 Recourse to second-best alternatives is obviously
costly relative to first-best trade channels. Nonetheless, it offsets some of the trade costs of war
as conventionally conceived, suggesting that existing estimates are inaccurate indicators of the
relationship between conflict and trade.
Existing Literature
Students of international politics assume that a conflict-trade linkage exists because real
income gains accrue to states engaged in exchange. In standard trade theory, cross-border trade
raises national income because it allows states to specialize in the production of goods in which
they have a comparative advantage. In exchange for exports of these goods, a nation can import
a larger quantity of another good than it previously produced at home. When conflict disrupts
trade, these gains from trade are forgone. Trade based on comparative advantage is at the core of
the liberal-peace argument. The history of trade itself, however, implies that this link arises only
in the late nineteenth century, when sharply falling transport costs made trade in staples
economically feasible (O’Rourke and Williamson 1999).
Most empirical analyses find that trade does indeed deter conflict. As Patrick McDonald
and Kevin Sweeney observe, for example, a “vast quantity” of evidence and different “research
4
A notable exception is Martin, Mayer and, Thoenig (2008), who examine the effects on bilateral
conflict of multilateral trade.
3
designs and estimating techniques” have led many student of international relations to conclude
that commerce and military conflict are inversely related (2007, 373). This is so whether they
use events data as their dependent variable or rely instead on the incidence of Militarized
Interstate Disputes (MIDs)—that is, government-sanctioned threats to use force, displays and
uses of force, and war. The finding is also robust to different trade measures: aggregate bilateral
commerce (e.g., Domke 1988; Gasiorowski and Polachek 1982; Polachek 1980; Pollins 1988,
1989; Oneal et al., 1996; Oneal and Ray 1997; Oneal and Russett 1999); trade asymmetries (e.g.,
Blanchard and Ripsman 1994; Gasiorowski 1986a, 1986b; Barbieri 2002); and bilateral trade in
goods lacking close substitutes (e.g., Dorussen 2006; Goenner 2010). 5
The consensus about the inverse relationship between trade and conflict is not complete,
however. Kenneth N. Waltz famously argued long ago that increasing interdependence can only
degrade peace, as it “means closeness of contact and raises the prospect of occasional conflict.
The fiercest civil wars and the bloodiest international ones are fought within arenas populated by
highly similar people whose affairs are closely knit” (1979, 138). Several empirical analyses
yield results consistent with Waltz’s claim. Katherine Barbieri, for example, finds a positive
association between trade and conflict during the year from 1870 to 1992 (2002, 75). This
outcome, she argues, emerges as a result of a dynamic similar to that in Waltz’s argument:
“interdependent actors frequently engage in conflict….Intra-community violence, family
violence, and civil wars are common” (Barbieri 2002, 124). 6
5
The asymmetry claim assumes that no substitute exists for the major trading partner. In
Hirschman’s seminal work (1945 [1980]), for example, Berlin could make small European states
depend on it because the Great Depression left them no other option.
6
Other studies reach similar findings (e.g., Wallenstein 1972; Reuveny 1999). In addition, some
find no significant effect of trade on conflict (e.g., Mansfield and Pevehouse 2000).
4
Relative to studies that examine the deterrent effect of trade, a dearth of evidence exists
about whether conflict reduces trade. This is so even though, as Barbieri notes, “the assumption
that war reduces trade is one of the central causal mechanisms underlying the liberal proposition
that trade promotes peace” (2003, 277). That states engaged in a conflict reduce their trade with
each other seems unproblematic. Yet, many studies assess the impact of conflict on trade only to
establish that endogeneity does not bias their estimates of the deterrent effect of trade. 7
An exception is Barbieri and Jack Levy (1999). They argue that war does not affect trade
across enemy lines. Using an interrupted time-series analysis, they study cases in which data
exist for 10 years before and after the Seven Years’ War, the War of 1812, and the Crimean War.
They report that trade between belligerents does not drop significantly, but they only examine
seven dyads. 8 James D. Morrow, Randolph M. Siverson, and Tressa E. Tabares (1997, 1998)
also find that MIDs do not affect major-power trade during most of the 1900s. In contrast, Beth
A. Simmons (2005) reports that territorial disputes and MIDs generally depress trade.
Regardless of their results, almost all existing studies of trade and conflict rely on postWorld War II data. As we note, this truncates the sample of conflicts. It also raises endogeneity
issues that do not exist earlier in the century. Tight links existed between postwar politics and
trade because U.S. officials believed that trade was essential to West European peace and
stability. The regime it created privileged intra-European and trans-Atlantic trade expansion.
The onset of the Cold War ensured that Soviet-bloc members would remain outside the regime.
Empirical analyses are consistent with the existence of a strong link between postwar politics and
7
Among these, some report that controlling for simultaneity reduces to insignificance the impact
of trade (e.g., Keshk, Pollins, and Reuveny, 2004).
8
Anderton and Carter (2001), examining 14 major-power dyads, report that war reduces trade.
5
trade, showing that the GATT privileged trade expansion between a small number of large
trading states, all of them U.S. allies and almost also of them also allied with each other (Gowa
and Kim 2005). That trade did indeed follow the flag after 1945 seems clear, making the
simultaneity of trade and politics a genuine concern.
The use of postwar data also raises concerns about whether existing analyses capture the
relationship between conflict and trade generally. During the “long peace,” the great powers
never engaged each other directly in a prolonged clash of arms. A positive development from
many perspectives, of course, the dearth of great-power war means that conflicts did not disrupt
trade on anywhere near the same scale as occurred earlier in the twentieth century. Its absence
may help to explain why existing studies rarely ask about substitution: the minor powers that
post-1945 disputes tend to engage are rarely each other’s or anyone else’s major trading partners.
In contrast, the great powers have often been the largest participants in world trade, and their
wars create large-scale shortages, raising prices and inducing widespread changes in output and
trade. Ships continued to plow the North Sea during the Great War, for example, because
supplying Germany with contraband was so lucrative (Lambert 2012, 276).
Small states are also less able to substitute domestic production for imports, given their
relatively small and typically not very diverse factor endowments (Polachek 1980). The states
that have been great powers can, for example, shift resources from livestock to grain production
to expand their food supplies (Olson 1963, 23). After Germany launched its unrestricted U-boat
campaign, Britain adopted price floors to encourage the plowing up of the “plentiful reserves of
land” that the grain invasion had put out to pasture (Broadberry and Harrison 2005, 18). By
1918, women, boys, and prisoners of war (Olson 1963, 99) had cultivated almost “4 million
acres of common areas and grassland” (Herwig 2000, 201). The supply of wheat rose by 60
6
percent and the output of potatoes and oats by half, keeping the per capita caloric intake of
British civilians at prewar levels (Lance and Engerman 2006, 184; Herwig 2000, 201). 9
Germany was worse off in this respect, although imports, rationing, illicit food markets, and
livestock and grain from occupied Romania kept its food supply “at tolerable levels” until defeat
was imminent (Offer 2000, 180).
Only one other study of the effect of the Great War on trade exists. It relies largely on
Barbieri’s data set, supplementing it with data from Mitchell (Glick and Taylor 2010, 105 n.
14). 10 Reuven Glick and Alan Taylor analyze 47 observations of wartime trade between the
belligerents and 335 observations of trade between neutrals and belligerents. 11 They use the
average imports of nondirected dyads as their dependent variable and estimate a standard gravity
model that includes dyad fixed effects. They find that that trade across enemy lines falls by
about 96 percent, while belligerent-neutral trade drops by about 42 percent (2010, 109). These
changes decreased trade during the war by a maximum of about 22 percent (2010, 116). 12
Glick and Taylor argue that using average imports as the dependent variable makes sense
because war “likely affects imports and exports equally” (2010, 105 n13). The assumption of
symmetry is untenable, however. In many cases, one state in a dyad increases its imports sharply
while its exports decline. As we show, exports from the belligerent exports fell as their imports
10
Below, we discuss the Barbieri and Mitchell data in more detail.
11
As Glick and Taylor point out, Oneal and Russett (2001) and Green, Kim, and Yoon (2001)
also use panel data but they estimate the impact of trade on conflict.
12
Findlay and O’Rourke note that these aggregates “mask a large range of individual country
experiences” (2007, 435).
7
rose, while U.S. exports increased much more sharply than did its imports. Using average
dyadic imports as the dependent variable threatens to understate the wartime shifts in trade.
Wartime Trade
As is implicit in the liberal-peace argument, the outbreak of the war triggered widespread
prohibitions on trading with the enemy. This was so even though the bans seemed very likely to
impose costs on both sides. Assuming that substitutes could be produced at home or obtained
abroad for the goods belligerents had previously traded among themselves, the restrictions
simply increased the costs of war without affecting its expected outcome. Even if a belligerent
had been the monopoly supplier of a crucial good to another, interrupting their trade still inflicts
costs on both: the buyer must find an imperfect substitute elsewhere; the seller foregoes the rents
from sales of the good. If an essential good has no close substitutes, on the third hand, it is hard
to explain the escalation of a dispute to war: the anticipated embargo should suffice to induce a
peaceful settlement (Eaton and Engers 1999).
Wartime trade disruption arose principally as an unintended consequence of the large
shifts in domestic resources that occurred as the belligerents tried to secure “abundant supplies of
industrial raw materials, finished military goods, and food” (Findlay and Kevin H. O’Rourke
2007, 431). In Austria-Hungary, for example, the share in manufacturing output of industries
essential to war (e.g., iron and steel) doubled to about 50 percent during the war (Schulze 2005,
86). Government spending, rarely more than 15 percent of gross domestic product (GDP) before
1914, rose sharply (Feinstein, Temin, and Toniolo 2008, 21). In Britain, it accounted for about
40 percent of GDP; the corresponding statistic in Germany was 60 percent (Broadberry and
8
Harrison 2005, 14). As a result, exports from the belligerents fell even as their demand for
intermediate and final goods rose.
In addition to bans on trading with the enemy, other efforts to cut off imports occurred.
Britain deployed the Royal Navy to decrease German imports. Initially, it targeted Rotterdam on
the assumption that it was the only port large enough to serve as an entry depot for the Central
Powers. However, it quickly became clear that Denmark, Norway, and Sweden could also
transship large amounts of goods. The inefficacy of the blockade early in the war is common
knowledge, allowing a major artery of supplies to the Central Powers to remain open. Indeed,
some historians argue that London adopted the blockade as a “deliberate attempt… to penetrate
new markets” (de Jong 2005, 140). 13 The lack of British access to the Baltic Sea precluded it
from stopping seaborne trade between Berlin and the Scandinavian countries (Davis and
Engerman 2006, 240 n3). More importantly, the British Foreign Office rarely agreed to detain
the ships the Royal Navy brought into port. Detaining them risked antagonizing the United
States, a major supplier of its munitions and “the most ardent of all champions of neutrality”
(Milward 1979, 306).
The lax enforcement of the blockade also reflected British dependence on Sweden for
supplies of iron ore, steel, and ball bearings and Russian reliance on goods transshipped via the
neutrals. London walked a fine line between stricter enforcement and “throwing the neutrals into
the arms of Germany or, in the cases of the Netherlands and Denmark, provoking a German
occupation that neither seemed likely to resist successfully” (Halpern 2006, 99). The same logic
motivated the neutrals to continue their exports to Germany, as did the rents they extracted as its
13
British exports and reexports to Sweden, Norway, and the Netherlands tripled in 1914. Danish
shipments increased nine times over (Osbourne 2004, 93),
9
virtual monopoly suppliers. As in World War II, as Alan Milward observed, trade with Berlin
continued because it was in in the interests of all the parties involved (1979, 322). 14
Berlin launched its own naval campaign in early 1915, inflicting heavy losses on British,
allied, and neutral shipping (Findlay and O’Rourke 2007, 430). The Entente’s ability to replace
ships accelerated over time, however (Abbatiello 2006, 166). More importantly, Britain began
naval and air convoys of merchant ships in 1917. Of the thousands of ships escorted, U-boats
destroyed only five (Abbatiello 2006, 108). Air patrols also restricted the utility of German
mines: they sighted unmoored explosives, enabling British minesweepers to clear the large mine
fields that lay beneath them (Abbatiello 2006, 103).
Historians regard Berlin’s launching of its unrestricted U-boat campaign in 1917 as “a
spectacular failure” largely because it led to U.S. entry into the war (Lance and Engerman 2006,
226). At the time, German officials hoped that the U-boats would succeed in forcing Britain out
of the war “within months,” a belief that Whitehall also held (Reiter 2009, 175). An embargo
on exports to the European neutrals accompanied U.S. entry into the war, reportedly eviscerating
their practice of consuming imports at home and exporting domestic output to Berlin. According
to historians, the blockade became “devastatingly” effective (Osbourne 2004, 168).
The war imposed on Britain a “devastating loss of market share in all types of products
and in all markets” (Feinstein, Temin, and Toniolo 2006, 61). By all reports, the United States
exploited the opportunity to replace Britain as the dominant trading nation. It “dramatically
14
Indeed, the demand Germany anticipated for imports in the event of a long war contributed to
its decision not to occupy the Netherlands. Helmuth von Moltke described Amsterdam as the
“windpipe” that would allow Berlin to breathe (Frey 2000, 228). For an analysis arguing that
German officials foresaw a long war, see Lieber 2007.
10
increased its share of global trade” (Frieden, Lake, and Schultz 2012, 20), almost doubling its
share of exports to about 25 percent by 1920 (Offer 1989, 450). The Great War, Jeffry Frieden
notes, enabled the United States to replace Britain as “the world’s principal industrial, financial,
and trading power” (2006, 132). 15 The U.S. expansion seemed likely to endure, as the advent of
the peace initiated Russian autarky and a series of new states and colonial mandates that in some
cases destroyed their prewar economic integration. The glut of global agricultural output, the
breakdown of the gold standard, and hyperinflation also portended a slow return to prewar trade
channels (Feinstein, Temin, and Toniolo 2006, 40).
Analysis
Data
Our data set includes about 38,000 observations between 1900 and 1929. Of these, about
4800 record wartime trade flows. They include 242 observations of trade across enemy lines and
1340 observations of belligerent-nonparticipant trade. During the war or part of it, Entente
members are Britain, its dominions, France, Russia, Japan, the United States, Brazil, Spain,
India, Portugal, Italy, Greece, Romania, Finland, China, Thailand, and the Philippines. The
Central Powers are Germany, Austria-Hungary, Bulgaria, and the Ottoman Empire.
The data set begins in 1900 because little information exists about trade before then. We
end our analysis in 1929 as we want to estimate the effects of the war independent of the trade
collapse that followed the advent of the Great Depression. Most of our data come from national
15
Japan also realized a trade boom, particularly in Asian markets (Davis 2008/09, 174). We not
have sufficient data to estimate wartime Japanese trade.
11
trade yearbooks, which record information about a country’s bilateral trade flows. 16 When no
trade yearbook exists, we use information from national statistical yearbooks. Absent either, we
use data from the League of Nations, which collected information about annual bilateral trade
flows for “all the most important countries of the world” between 1913 and 1919 and monthly
figures thereafter (Loveday 1921, 159). To fill in missing pre-1914 data, we use records of the
annual trade of each country with its principal trading partners in the Statesman’s Yearbooks.
Published by Macmillan, the series begins in 1864 and is subtitled “a Statistical, Mercantile, and
Historical Account of the States and Sovereigns of the Civilized World.”
The value added of our data set stems primarily from the use of national trade records.
Barbieri uses the Statesman’s Yearbooks for the years between 1870 and 1912 and League of
Nations publications for the years after 1912. Her data include only about 60 observations of
wartime trade. She includes only independent countries, omitting trade involving such major
colonies as India, Indonesia, and Canada before 1920. Glick and Taylor use the Barbieri data,
supplemented by data from Mitchell. The Mitchell volumes include more World War I data but
only for a limited number of trading partners. The national sources include data on a broader
range of countries and the trade between them and many others, including colonies. Perhaps
most importantly, many national publications record wartime trade, enabling us to increase our
coverage of commerce during World War I.
Some data remain spare, nonetheless. Although many countries report trade statistics
during the First World War, not all do. This includes three belligerents—Germany, Belgium,
and the Ottoman Empire. To fill these gaps, we record as country A’s imports from B the
16
Appendix A lists the publications consulted for each country.
12
exports that B reports shipping to A. As is conventional, we multiply the data by 1.1 to take into
account the fact that records of imports and exports diverge by about 10 percent because import
statistics reflect the added costs of insurance and freight. We reverse the data only after we
compare the non-missing import data with the reversed export data. If the ratio of imports to
reversed exports was between 0.85 and 1.15 for the years around missing import values, we used
the reversed export values to fill in the missing import values. This enabled us to fill in 1214
observations before 1930, including 346 between 1914 and 1919.
As is standard, we use the Global Financial Database to convert trade reported in national
currencies into U.S. dollars. It records daily or monthly information about exchange rates for
most states as early as the 1800s. 17 We obtain average annual data by selecting the annual option
and period average. 18 If an inconsistency exists between Global Financial Database and other
sources, we substitute data from the latter as they conform more closely to trends.
We have checked our data against available data from the United Nations Statistical
Office, which calculates the sum of total world exports before 1930 on the basis of national
reports of aggregate trade. In Figure 1, the solid line plots the UN data on total world exports
between 1900 and 1913 and between 1921 and 1929. 19 The dashed line plots world trade based
on our data on annual dyadic observations. The vertical lines demarcate the Great War. The
figure shows that our data closely track existing data for the years before and after the war. As
17
We also examined other sources of information. Polity II has exchange-rate information but
also a large number of missing observations. We also collected data from the Federal Reserve
Bulletin and from Lawrence Officer (2009). Both begin only after 1919. The correlation
between the FRB/Officer data and the Global Financial Database data is 0.99.
18
For data on Costa Rica in 1919 and 1920, we use the Federal Reserve volume, Banking and
Monetary Statistics, 1914-1944.
19
http://unstats.un.org/unsd/trade/imts/historical_data.htm. The UN data include some bilateral
data for three years between 1900 and 1930 (1900, 1913, and 1928).
13
we use the same sources to record all trade between 1900 and 1929, the close correspondence
between the two graphs provides some reassurance about the accuracy of our data.
Figure 1
Figure 1 show that trade rose steadily before the war. “Spectacular” falls in freight rates,
steadily rising incomes, stable exchange rates, and relatively low tariffs created the so-called first
golden age of trade (Estevadeordal, Frantz, and Taylor 2003, 366). The graphs also show a rapid
recovery of trade after 1918. The effects of the moderately severe recession that occurred early
in the 1920s are also captured in our data (Feinstein, Temin, and Toniolo 2006, 42).
Before we turn to the estimates the gravity model produces, we provide three figures that
graph the trade of different groups in constant dollars. There are four things to note about them.
First, their range varies. Second, they trace out changes in trade between states in a given group
across the early twentieth century. In contrast, the estimates we report below measure trade
changes between these countries relative to the changes in trade between each dyad member and
14
other states. As a result, no one-to-one correspondence exists between the figures and the
regression estimates. Finally, we do not graph all relationships of interest to conserve space.
Figure 2 plots the sum of world imports in constant dollars. It shows that trade fell in
1914 and then rose sharply during the war before dropping off somewhat in its last year. Given
the bans on trading across enemy lines, the figure suggests that trade patterns shifted
considerably during the war after about a one year lag. 20
Figure 2. Sum of World Imports
Next, we plot trade across enemy lines. As expected, Figure 2 shows a sharp fall in trade
between the adversaries during the war. The fall is attributable to bans on trade with the enemy,
but is also due to the war’s increasing absorption of domestic resources.
20
Using a model with dyadic and year fixed effects, we estimated the effect of the war on overall
trade. We find it dropped by about 29 percent relative to 1913 trade, a decline that is due solely
to the sharp drop in trade across enemy lines. Complete results are available from the authors.
15
Figure 3: Trading with the Enemy
The next graph displays trade between Entente members. It shows that their wartime
trade rose sharply, implying that they became each other’s principal substitutes for their prewar
trading partners. The United States, for example, supplied Britain with more than half its bread
and flour and about 80 percent of its meats and fats in 1917 and 1918 (Offer 2000, 376).
Figure 4. Trade between Entente Members
16
Estimation
The existing literature relies exclusively on time-series cross sectional analyses. We use
a panel-data approach to estimate wartime trade in order to control for the constant unmeasured
country-pair attributes that can affect the propensity of particular nations to engage each other in
trade (Egger and Pfaffermayr 2003, 572). Dyadic variables that are constant across time—e.g.,
distance, language, colonial ties—drop out of the analysis. In all estimations, we cluster the
standard errors at the directed-dyad level to correct for heteroskedascity. As recent theoretical
work recommends, we also include importer-year and exporter-year dummy variables to control
for time-varying factors that affect national trade (Anderson 2010, 24).
These “multilateral resistance” terms proxy for country-level factors in any given year
that can affect a nation’s trade with all other countries but that cannot be easily measured (Mathy
and Meissner 2011, 18). They also control for annual changes in some standard gravity-model
variables (e.g., GDP, population), exchange rates, and inflation. That they control for changes in
a state’s annual imports means that all country-pair effects cannot be estimated simultaneously.
For example, we cannot estimate trade between states in a wartime coalition, between states in
different coalitions, and between a coalition member and a nonparticipant, as the three terms are
perfectly collinear with the country-year fixed effects for coalition members.
In the specification we use, the coefficients measure the wartime change in the average
trade of a dyad relative to the changes in its members' wartime trade with other countries. For
example, suppose we estimate a model that includes a variable representing trade across enemy
lines and dyad and country-year fixed effects. The coefficient on belligerent-belligerent trade
measures the change in their trade relative to the changes in wartime trade between the countries
in these dyads and all other states except their adversaries.
17
We test four hypotheses implicit in our earlier discussion of war and trade. We expect a
fall in trade across enemy lines. In contrast, we expect a rise in trade between coalition members
as they substitute each other for their prewar trading partners and maximize the efficacy of their
joint war effort. We expect neutral trade to change, although the sign of the change is unclear
given that the naval blockade was less than watertight. Finally, we expect U.S. trade to rise.
To measure trade across enemy lines, we create a variable that assumes a value of one
when a country pair includes an Entente member and a Central Power. 21 We construct two
variables to measure intra-coalition trade. The first takes on a value of one when country pairs
include two members of the Entente; it is zero otherwise. The second assumes a value of one
when a dyad includes two Central Powers.
We also examine trade between the Central Powers and the nations that seemed likely to
reap the highest profits from the bans on trading with the enemy—that is, the European neutrals,
particularly those contiguous to Germany by land or short stretches of sea. We create a variable
we label “neutral-axis.” It takes on a value of one when dyads include a Central Power and
either Denmark, Norway, Sweden or the Netherlands. Because the Mediterranean remained a
distinctly second-order theater of war (Hardach 1977, 26), we do not include the southern
European neutrals in the baseline analysis; we report below on the effects of adding them.
As is standard in the literature on trade and conflict, we also control for whether states are
members of a common alliance, including but not limited to the wartime alliances. Analyses of
the postwar era typically show that alliances have a positive and significant impact on trade (e.g.,
Morrow, Siverson, and Tabares 1999; Simmons 2005). This result is usually attributed to the
21
Appendix B lists the states in the sample and their wartime participation and bloc affiliation.
18
rise in intra-alliance welfare that trade produces (Gowa and Mansfield 1993; Gowa 1994).
Because trade between allies increases the income of each, it generates positive security
externalities—that is, it increases the potential power of the alliance as a whole.
The data set that Brett Ashley Leeds and others constructed provides the data that we use
to identify alliances. It defines them as accords between two or more independent states that
include promises “to aid a partner in the event of military conflict, to remain neutral in the event
of conflict, to refrain from military conflict with one another, or to consult/cooperate in the event
of international crises that create a potential for military conflict” (Leeds et al. 2002, 238). We
create a dummy variable that assumes a value of one when an alliance exists between states.
We do not separate out the wartime coalitions. Alliance dyad years account for only 5
percent of Entente-member dyad years. The corresponding statistic in the case of the Central
Powers is 42 percent, but only one country—Austria-Hungary—is not a formal ally. The main
Entente and Central Power terms themselves, therefore, pick up the effects of both the formal
and informal alliances between their members. The alliance term includes, therefore, all formal
alliances in existence between 1900 and 1929.
The first column in Table 1 shows that trade across enemy lines falls sharply. 23 It drops
by almost half relative to their trade with other states, a change that is both large and statistically
significant. 24 In contrast, significant increases in trade occur between members of the same
coalition: Entente member trade about 40 percent more with each other than they do with other
23
All t-tests are two-sided. Unless otherwise indicated, the coefficients reported as significant in
the text have p-values ≤ 0.05.
24
As the dependent variable is logged, the effect of a coefficient x is the exponential of (x – 1).
The coefficients measure the percent of trade changes when a dummy changes from zero to one.
19
states during the war; the corresponding statistic for the Central Powers indicates that trade
between them rose by a factor of 82 relative to their trade with other states.
Measuring trade involving Entente members likely understates the change in trade
between states that relied most heavily on transatlantic trade routes. In separate analyses, we
disaggregate the Entente to measure trade between the United States, Canada, Britain, France,
and Russia separately. Wartime trade between them increases by almost 125 percent; their trade
with the Central Powers falls by about 75 percent. The changes between other Entente members
as well as between them and the Central Powers are much smaller.
The results also show that the war opened and/or intensified the use of other channels of
trade. The Central Powers increased their imports from the Netherlands, Denmark, Norway, and
Sweden. The table shows that wartime trade between these states and the Central Powers rises by
a factor of almost 6.5. Disaggregating these flows shows that both the imports of the neutrals
from the Central Powers and their exports to them increases. We also test whether U.S. entry
into the war, as long reputed, affects this trade. We replace the indicator of neutral-axis trade
with two variables. The first codes these pairs as one during the first two years of the war and is
zero otherwise; the second codes them as one during the last two years of the Great War. The
results show that the coefficients on these two variables do indeed differ. In striking contrast to
the conventional wisdom, however, trade between the neutral and axis countries actually
increases significantly between the first and second half of the war. 25
The sharp increase in neutral-axis trade makes clear that transshipments replaced trade
between the belligerents. Bans on trading across enemy lines and the paralysis of the German
25
We get the same effect in a model containing dyadic and year fixed effects.
20
merchant shipping fleet cut Berlin off from its prewar import sources, forcing them to rely
heavily for their imports on the northern neutrals. The increases observed are consistent with
historical accounts that denigrate the efficacy of the British blockade early in the war. They are
inconsistent, however, with the conventional wisdom about the impact of U.S. entry into the war.
The United States seems to have walked the same line between Scylla and Charybdis that Britain
had traversed since 1914: while lax enforcement allowed goods to reach the Central Powers, it
also kept the neutrals out of German hands and secured Russian access to critical imports.
The results also show that intra-alliance trade dropped relative to both the base group and
other countries in the first three decades of the twentieth-century, although the change is
insignificant. The inconsistency between this result and analyses of the post-1945 era warrants
further analysis. The theory about alliances and trade assumes that power aggregation motivates
coalition formation, endowing allies with stakes in each other’s welfare. Yet, this may not
always be true. A state that signs a nonaggression pact, for example, does so in the hope that the
pact will deter other signatories from joining a third-party attack on it. This was certainly true of
the 1939 Molotov-Ribbentrop agreement. The commitments that these and other low-level
agreements represent can make the security externalities associated with increases in an ally’s
income negative rather than positive. Strengthening potential enemies is not in any state’s
interest.
The striking difference between alliance effects across time arises because their
distributions vary dramatically. The interwar era, for example, is notorious among students of
international relations because its security coalitions display a striking lack of commitment.
Rampant conflicts of interest made states reluctant to commit even on paper to aid each other in
the event of war: 60 percent of alliance dyad years between the wars consist of neutrality,
21
nonaggression, or consultative pacts. During the Cold War, in contrast, defense pacts account
for 76 percent of alliance dyad years. The distribution between 1900 and 1930 more closely
resembles the interwar years than the Cold-War era: 57 percent of alliance dyads years
represent neutrality, nonaggression, or consultative agreements.
To determine whether different alliance types matter, we disaggregate the alliance
variable. We create a dummy variable that takes on a value of one if nonaggression, neutrality,
or consultative agreements link states; it is zero otherwise, including when states belong to a
common defense or offense pact. A second variable assumes a value of one when a defense or
offense pact links countries in a dyad. Defense pact signatories promise to provide “active
military support in the event of attack on the sovereignty or territorial integrity” of an ally (Leeds
and Mattes 2007, 189). An offensive treaty promises “active military support in any
circumstances not precipitated by an attack” on an ally (Leeds and Mattes 2007, 189-90).
The results in column 2 of Table 2 show that alliance types do matter: low-level alliances
depress trade by about 20 percent; defense and/or offensive alliances raise it by about 12
percent. 26 Although the latter coefficient is not itself significant, the difference between alliance
types is significant. Not all intra-alliance trade is especially valuable. 27 Indeed, some of it seems
to be regarded by the signatories as welfare decreasing, consistent with the idea that the
motivation of some pacts is to deter their members from attacking each other.
26
There are only 16 alliances that are limited exclusively to offensive agreements between 1900
and 1929. These represent 0.01 percent of total alliances.
27
Andrew Long (2003) reports that it is only defense pacts that affect major-power trade between
1885 and 1990.
22
Finally, we turn to our fourth and final hypothesis. We ask whether the United States
exploited the trade opportunities the Great War created. We recode to zero any other dyadic
variable that includes the United States as a member. Thus, for example, we recode to zero the
Entente pairs in which the United States is a member. We distinguish between country pairs in
which the United States is the importer and those in which it is the exporter. We create four
groups. Each country pair in every group includes the United States as a member. The other is,
respectively, an Entente member, a Central Power, a Scandinavian neutral, or another country.
The excluded group consists of dyads during the war that include the United States paired with
either a Central Power or a southern European neutral.
The results in Table 2 show that the war leads to large and statistically significant shifts in
U.S. trade. Between 1914 and 1918, U.S. exports to Entente members and to the Scandinavian
neutrals rise by a factor of more than five. U.S. exports to other nonbelligerents increase by a
factor of four. On the import side, the only significant change is a rise of almost 90 percent in
goods shipped to the United States from other Entente members. Given the reallocation of
resources within the belligerents, the asymmetry between U.S. imports and exports are not
surprising. These results are consistent with the interpretation that the United States stepped
into the breach left by the fall in belligerent exports.
Robustness checks
Finally, we test the robustness of our results. Because, many scholars believe that joint
democracy encourages trade, we add to the analysis a variable that indicates dyads in which both
members have a Polity 2 score of 6 or higher. Next, we add all European neutrals. Finally, as
Germany occupied Belgium for most of World War I, we recode Belgium as a Central Power.
23
As Table 4 shows, the only change that occurs when we add democracy to the analysis is
that trade across enemy lines loses its significance. This is likely due to the fact that almost onethird of cross-coalition observations are dropped from the estimation due to missing democracy
data. The sign on joint democracy is negative and significant but only at the 10 percent level.
No coefficient changes occur when we include neutral countries other than the Scandinavian
states (i.e., Albania, Spain, and Switzerland) or when we recode Belgium as a Central Power.
Including the three other European neutrals further increases trade with the central powers,
increasing it by a factor of almost nine.
Conclusion
That the First World War unleashed tremendous destruction is indisputable. It marked
the beginning of what has been described as the long European civil war. It resulted in millions
of casualties and destroyed large amounts of physical capital. In its wake, the great powers
proved unable to establish anything remotely similar to the Concert of Europe that succeeded the
Napoleonic Wars. Their best efforts produced a League of Nations that proved powerless to
resolve the conflicts of interest that stymied cooperation among them. They could agree neither
on the enforcement of the Versailles Treaty nor on a collective response to the Great Depression,
setting the stage for the outbreak of the Second World War.
The Great War has long played a central role in debates about the relationship between
trade and conflict. The outbreak of war seemed to destroy any hope that states would respond to
the idea that the gains from war had become a “great illusion.” The engagement on opposite
sides of the states that had been each other’s major trading partners also destroyed hopes that
economic linkages could secure peace. The liberal-peace argument weights too heavily the
24
destruction of trade across enemy lines and weights too lightly both the trade that can arise in its
place and the ability to shift domestic resources to produce at home goods previously imported.
Although relying on second-best sources is obviously costly relative to the first-best alternative,
its costs pale in comparison to those that a complete breakdown of trade imposes.
The Great War closed off some avenues of trade but it also opened others that were not
competitive in ordinary times. It wreaked havoc only on trade between the belligerents. The
United States stepped readily into the breach that a shortfall in European exports created. The
northern neutrals did too, exploiting the leaks the blockade sprang because of the ambivalence of
its administrators about its success. Studies of economic sanctions show that they achieve their
objectives only if they shut down alternative supply sources. The same lesson applies to conflict
and trade: an inability to eliminate second-best options decreases the impact of war on trade as
well as the deterrent power of trade.
25
Table 1: Effect of World War I on trade
Model 1
b/se
Model 2
b/se
Model 3
b/se
Two Entente members
0.34***
(0.13)
0.31**
(0.13)
0.33**
(0.13)
Two Central Powers
4.43***
(0.80)
4.68***
(0.87)
4.31***
(0.77)
Cross-coalition dyads
-0.62**
(0.28)
-0.51*
(0.28)
-0.61**
(0.28)
Neutral-Central Power
2.01***
(0.41)
2.01***
(0.41)
Neutral-Central Power (1914-16)
1.07***
(0.38)
Neutral-Central Power (1917-18)
3.67***
(0.67)
All alliances
-0.12
(0.08)
-0.11
(0.08)
Non-defense alliances
-0.21***
(0.07)
Defense pacts
0.10
(0.17)
_cons
1.27
(1.13)
-4.29***
(1.51)
-1.17
(1.37)
N
37956
37956
37956
Log-likelihood
-53859.40
-53807.32
-53854.67
Note: All models include dyadic fixed effects and importer-year and exporter-year fixed effects
(not shown). Standard errors are clustered on directed dyads. Significance levels: *** p-value ≤
0.01; ** p-value ≤ 0.05; * p-value ≤ 0.10.
26
Table 2: US Trade during World War I
Model 1
b/se
US Imports from Scandinavia
0.16
(0.26)
1.83**
(0.82)
0.69**
(0.30)
1.88**
(0.85)
0.63***
(0.24)
1.64**
(0.81)
-0.20***
(0.07)
0.11
(0.17)
-1.32
(1.00)
37956
-53843.27
US Exports to Scandinavia
US Imports from Entente
US Exports to Entente
US Imports from non-belligerents
US Exports to non-belligerents
Non-defense alliances
Defense pacts
_cons
N
Log-likelihood
Note: all models include dyadic fixed effects and importer-year and exporter-year fixed effects
(not shown). We include in the model trade between Entente members, the Central Powers, and
trade across enemy lines and neutral-axis trade. As their coefficients are the same as those in
Table 1, we do not report them here. Standard errors are clustered on directed dyads.
Significance levels: *** p-value ≤ 0.01; ** p-value ≤ 0.05; * p-value ≤ 0.10.
27
Table 4. Robustness checks
Two Entente members
Democracy All
neutrals
b/se
b/se
0.46***
0.32**
(0.15)
(0.13)
Two Entente members
Two Central Powers
Belgium as
Axis
b/se
0.37***
(0.13)
6.16***
(1.25)
4.90***
(0.78)
Two Central Powers (w/
Belgium)
3.63***
(0.73)
Cross-coalition dyads
-0.48
(0.41)
-0.33
(0.27)
Cross-coalition dyads (w/
Belgium)
-0.57**
(0.24)
Neutral-Central Power
1.73***
(0.55)
2.29***
(0.39)
Neutral-Central Power (w/
Belgium)
Non-defense alliances
Defense pacts
Democracy
1.47***
-0.22***
(0.07)
-0.02
(0.15)
-0.17*
(0.10)
-0.21***
(0.07)
0.10
(0.17)
(0.40)
-0.20***
(0.07)
0.12
(0.17)
Neutral-Central Power (All
neutrals)
Southern Neutrals-Central
Power
1.23**
(0.48)
_cons
-2.32***
-1.11
-1.15
(0.57)
(1.42)
(1.40)
N
28258
37956
37956
Log-likelihood
-38797.22 -53836.49 -53875.49
Note: All models include dyadic fixed effects and importer-year and exporter-year fixed
effects (not shown). Standard errors are clustered on directed dyads. Significance levels:
*** p-value ≤ 0.01; ** p-value ≤ 0.05; * p-value ≤ 0.10.
28
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