Trading peace: peace agreements, trade liberalization and integration, and the resolution of interstate territorial conflicts

Territorial interstate disputes tend to be intractable and escalation-prone to militarized conflicts. While peace agreements are commonly used to resolve such disputes, their effectiveness depends on whether they are reinforced by complementary economic arrangements. This article examines whether free trade agreements enhance the conflict-reducing effect of peace agreements between rival countries disputing over territories claimed as part of their homeland. We develop a game-theoretical model that integrates interstate negotiations over trade and peace with domestic political economy. The theoretical model predicts that a free trade agreement enhances the pacifying effect of a peace agreement that addresses the territorial dispute when it raises aggregate welfare and financially benefits export-oriented groups. We show strong empirical support for these predictions using panel data on dyads that experience territorial disputes over territories they claimed as part of their homeland. Nonetheless, we highlight that trade liberalization and integration alone have no pacifying effect in absence of a peace agreement. Our article contributes to the trade-conflict debate by showing that trade liberalization and integration can consolidate territorial peace, but only when they complement the resolution of the core political disputes.