The impact of interstate soft conflicts on bilateral trade flows using structural gravity model

Abstract This paper contributes to the literature on the economic impact of interstate conflicts by focusing on empirical analysis of the impact of interstate soft conflicts on bilateral trade. Interstate soft conflicts arising from the failure of diplomacy when a military operation seems too radical may act as a policy tool and have a negative impact on bilateral relations. The empirical approach is based on the use of balanced panel data with annual observations and a theory‐consistent structural gravity framework, augmented by a new measure of interstate soft conflict. The results of standard gravity estimators show that interstate soft conflicts have a sustained negative impact on bilateral trade, regardless of the control for omitted variables (presence of regional trade agreements, various types of sanctions, state acts, and militarised interstate disputes) and different model specifications.