Trade and Civil Conflicts

This paper investigates the impact of civil conflicts on international trade. First, it quantifies how much civil conflicts suppress trade and explores the underlying mechanisms within a structural gravity model. Trade openness can lower the risk of civil conflicts because expected gains from international trade could discourage both governments and rebels from igniting conflicts (deterrence mechanism). Alternatively, international trade could act as a substitute for internal trade, lowering the opportunity cost of civil conflicts (insurance mechanism). This paper empirically investigates both mechanisms. Second, the paper investigates the spillovers of civil conflicts on trade for neighboring countries uninvolved in the conflict. Third, it examines if the impact of civil conflicts is contemporaneous or persistent through time. The paper uses data on violent civil conflicts and international and intra-national trade data from 142 countries to estimate a structural gravity trade model for 1989-2006. The results show that civil conflicts in a country can reduce its trade with other countries by over 40 percent. Spillovers of neighboring civil conflicts are also highly detrimental. Finally, the impact of civil conflicts is highly persistent through time and increases with the duration of the conflict.