Bilateral Conflict Risk and Trade: Military Wars, Trade Wars, and Diplomatic Noise

Joshua Aizenman, Rodolphe Desbordes and Jamel Saadaoui

No 35077, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: How damaging is a “trade war” compared to a “military war” or a “war of words”? Aggregate conflict indicators cannot say, because they treat missile strikes, sanctions, and diplomatic protests as equivalent. We build a monthly bilateral indicator from GDELT event data, calibrated against human-curated ground truth, that decomposes hostility into four layers: kinetic fighting (“military war”), military posture, sanctions-context tensions (“trade war”), and routine diplomacy. The decomposed panel reveals a secular shift: over the past decade, governments have steadily substituted economic coercion for military confrontation, nearly doubling the trade-weighted share of hostility channelled through sanctions contexts. In a gravity trade model, the aggregate indicator is negative, large, and statistically significant, but the decomposition reveals that only two layers drive the result. Kinetic conflict and trade-context hostility are both economically large and precisely estimated; routine diplomacy, despite dominating measured hostility, has no trade effect at all. The directed structure uncovers a retaliation channel that compounds trade losses over several months. Our measure remains a robust determinant of international trade in a horse race against closest alternative bilateral indicators. Relative to a pre-escalation baseline, the geopolitical deterioration of the past decade has put roughly $334 billion of bilateral trade at risk, with the US–China pair accounting for half.

JEL-codes: F15 F43 F5 F50 F51 (search for similar items in EconPapers)
Date: 2026-04
Note: IFM ITI POL
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