Regionalism and conflict: Peace creation and peace diversion

We investigate the implications of preferential trade agreements (PTAs) for interstate conflict. We set up a two-stage game with three competing importers, where first, two of the countries decide on whether to initiate war against each other, and subsequently, all three countries select their import tariffs. We show that PTAs produce both a “peace-creation” effect and a “peace-diversion” effect, whereby they reduce the likelihood of conflict between member countries (peace creation), but render the eruption of war between member and non-member countries more likely (peace diversion). This paper is the first to identify and explicitly model the peace-diversion effect of PTAs, and is also the only one in this literature to endogenize countries' terms of trade. We use data from the Correlates of War project to empirically test these predictions, and after controlling for endogeneity, we find robust evidence of both peace creation and peace diversion in relation to PTA establishment.