MATTEO NERI--LAINE
Sovereign Gravity
The Military Alliance Effect on Trade
International insecurity can severely disrupt trade. This paper studies treaties aimed at preventing such insecurity: military alliances. Taking a structural gravity approach based on a sample of 6,972 country pairs from 1967 to 2012, we show that alliances increase trade by 60% on average. Yet, the effects of military alliances are highly heterogeneous. They depend to a large extent on the type of alliance and the sensitivity of economies to trade costs. We use robustness tests and the instrumental variables strategy to confirm the causal interpretation of the results. Investigating the mechanism behind the impacts of military alliances, we demonstrate that alliances increase trade by reducing international insecurity. General equilibrium analysis moreover shows that the growth in trade generated by military alliances brings substantial welfare gains for signatories and losses for non-aligned countries.