International trade and domestic legal systems: examining the impact of Islamic Law

What factors determine countries' international trade relations? Recent theories point to the potential importance of domestic legal traditions. Countries' legal systems influence the enforcement of contracts. This has been shown to affect trade flows in common law and civil law countries. However, these two legal systems do not constitute the universe of legal traditions. Islamic law is an important and fundamentally distinct legal system that has been largely overlooked. In this article, we offer the first direct test of the effect of Islamic law on countries' trade relations. We find that, on average, levels of bilateral trade are lowest among Islamic law states, holding all else constant. This finding suggests that, contrary to conventional wisdom, shared institutions alone are insufficient to enhance trade flows. Instead, levels of bilateral trade depend critically on the quality of shared institutions. The importance of countries' legal systems for trade declines over time, possibly due to the increased role of international arbitration bodies and/or the standardization of international sales contracts.