Market rules: The incidental relationship between democratic compatibility and international commerce

Democracies trade more with other democracies than they trade with closed political systems, but why they do so is unclear. We present a "gravity equation" that disentangles foreign policy from country-specific influences on trade by adding explanatory variables to control for traits of both the mass public and the domestic political system. We apply the resulting model to a data set covering 50 years (1948-1997) and 72 countries. The estimated effect of joint democracy, which appears in the absence of the country-specific variables, drops out when these control variables are added to eliminate omitted variable bias. Democracies do not trade together any more than they would incidentally given the usual social, economic, and political influences on commercial activity, calling into question explanations for their mutual trade activity that rely on foreign-policy favoritism or institutional compatibility.