Of Iron or Wax? The Effect of Economic Integration on the Reliability of Military Alliances***

Abstract

Abstract In this paper we analyze what determines if a military alliance represents a credible commitment. More precisely, we verify if economic integration of military allies increases the deterrent capability of an alliance, and its effectiveness in the case of third-party aggression. We propose that growing intra-alliance trade creates audience costs and sunk costs for political leaders who venture to violate conditions of an alliance treaty. Therefore, intensive trade can be regarded as a signal of allies’ determination to aid one another in the case of third party aggression, and a deterrent of such aggression. Regression analysis of bilateral fixed-term mutual defense agreements concluded between 1945 and 2003 reveals that large trade volumes among military allies indeed reduce the likelihood that their political leaders will breach alliance commitments. Intra-alliance trade also displays a number of interesting interaction effects with the other common predictors of military alliance reliability such as shared allies’ interests and values, symmetry of their military capabilities, their geographic location and domestic political institutions.