Abstract: This paper studies both theoretically and empirically the impact of using trade as a peace instrument to avoid an anticipated interstate conflict between countries disputing a historical territory. The impact of trade is examined through the role of organized interest groups in influencing their governments’ foreign policies. A game theoretical model is used to observe the dynamics at the domestic and international level of negotiating a peace agreement that can be accompanied with a trade agreement. Using backward induction, I find that the probability of conflict depends on the contribution schedules offered by organized interest groups, weighted aggregate welfare, and military cost. Using the linear probability model with fixed effects, I test the model empirically. The main result is that the probability of an interstate conflict is lower when the government adopts trade liberalization policies in export-oriented industries while protecting import-competing industries. This indicates that organized interest groups are key when it comes to using trade to dampen conflicts.
(JEL Codes: F13, F14, F51, F52, F53)