October 2004

IZA DP No. 1334: How Outsourcing Affects Bilateral Political Relations

published in: Indian Journal of Economics and Business, 2004, 3 (special issue), 29-42.

One issue the literature neglects is how outsourcing stimulates trade (imports, exports and foreign direct investment), thereby affecting political relations. However, at least as far back as 1750, economic philosophers such as Baron de Montesquieu in his L’Esprit des Lois, argued, “peace is the natural effect of trade.” This paper first reviews this literature and then presents econometric evidence. The evidence integrates political international relations events data with economics data on bilateral trade. The resulting econometric models show that trade between nations fosters more peaceful dyadic relations.