BILATERAL TRADE AND POLITICAL CONFLICT COOPERATION - DO GOODS MATTER/

This article investigates Granger causality between political conflict /cooperation and bilateral trade. The measures of conflict/cooperation are constructed by accumulating daily events and splicing the two dat asets of the Conflict and Peace Data Bank and the World Events Interac tion Survey. Trade data from the United Nations include ren commodity groups as well as total trade. Quarterly data are analyzed from the ve ry early 1970s to the early 1990s for four dyads of USA-USSR USA-China , Turkey-Greece, and Egypt-Israel. Yearly data are investigated from t he early 1960s to the early 1990s for 16 dyads. Granger causality betw een bilateral trade and conflict/cooperation is generally reciprocal i n most goods and dyad dependent, but independent of whether or nor two countries are political rivals. For USA-USSR and USA-China, however, there is a tendency for bilateral trade to increase in some goods when political relations improve. For USA-USSR, in particular, causality f rom conflict to trade is pronounced in more goods than causality from trade to conflict. While the effect of cooperation in these dyads is m ostly positive, the effect of an increase of trade on conflict is gene rally ambiguous. For 20 dyads collectively, conflict/cooperation tends to Granger-cause bilateral trade in minerals, iron and steel, fuels, basic manufactures and control and scientific equipment; whereas bilat eral trade somewhat more frequently Granger-causes conflict/cooperatio n in food and live animals, beverages and tobacco, and machines and tr ansport equipment. The concept of strategic goods, much debated in the literature, is further discussed in light of these results. The gener al result of reciprocal Granger causality calls for a model in which b oth bilateral trade and conflict/cooperation are simultaneously determ ined. Such a simultaneous equations model is briefly sketched.