POWER-POLITICS AND INTERNATIONAL-TRADE

Recent literature attributes the relative scarcity of open internation al markets to the prisoner's dilemma structure of state preferences wi th respect to trade. We argue that the prisoner's dilemma representati on does not reflect the most critical aspect of free trade agreements in an anarchic international system, namely, their security externalit ies. We consider these external effects explicitly. Doing so leads us to two conclusions: (1) free trade is more likely within, rather than across, political-military alliances; and (2) alliances are more likel y to evolve into free-trade coalitions if they are embedded in bipolar systems than in multipolar systems. Using data drawn from an 80-year period beginning in 1905, we test these hypotheses. The results of the analysis make it clear that alliances do have a direct, statistically significant, and large impact on bilateral trade flows and that this relationship is stronger in bipolar, rather than in multipolar, system s.