Collateral Damage: Trade Disruption and the Economic Impact of War

TLDR

Conventional wisdom in economic history suggests that conflict between countries can be enormously disruptive of economic activity, especially international trade. The study examines how wars affect bilateral trade using data from 1870 onward. Using a gravity model, the authors estimate contemporaneous and lagged trade effects of wars on belligerent and neutral countries, controlling for other determinants and reverse causality, and conduct a general‑equilibrium comparative‑statics exercise. They find large, persistent trade, income, and welfare losses from wars, with lost trade costs potentially matching or exceeding conventional direct war costs, as illustrated by World War I and II case studies.

Abstract

Conventional wisdom in economic history suggests that conflict between countries can be enormously disruptive of economic activity, especially international trade. We study the effects of war on bilateral trade with available data extending back to 1870. Using the gravity model, we estimate the contemporaneous and lagged effects of wars on the trade of belligerent nations and neutrals, controlling for other determinants of trade, as well as the possible effects of reverse causality. We find large and persistent impacts of wars on trade, national income, and global economic welfare. We also conduct a general equilibrium comparative statics exercise that indicates costs associated with lost trade might be at least as large as the conventionally measured direct costs of war, such as lost human capital, as illustrated by case studies of World Wars I and II.