ABSTRACT

Territorial interstate disputes tend to be intractable and more likely to escalate to militarized conflicts compared to non-territorial disputes. While peace agreements are commonly used to solve such disputes, their effectiveness may depend on broader forms of economic integration. This article examines whether the combination of a customs union and peace agreement reduces the likelihood of conflict between two countries disputing over a territory. We develop a game-theoretical model that identifies the conditions under which customs unions decrease incentives to fight compared to partial scope agreements or peace agreements alone. The model predicts that conflict is less likely when a customs union maximizes aggregate welfare and that of export-oriented groups. We evaluate these conditions empirically using data on country-dyads that engaged in violent territorial disputes over the past two centuries. The results provide robust evidence that the combination of a customs union and a peace agreement significantly reduce the risk of a militarized interstate conflict, particularly where more people stand to benefit financially from the integration with the rival country. These findings highlight the importance of integrating institutionalized economic cooperation on consolidating territorial peace.