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Arming in the Global Economy: The Importance of Trade with Enemies and Friends

Michelle Garfinkel (), Constantinos Syropoulos and Yoto Yotov

No 7500, CESifo Working Paper Series from CESifo

Abstract: We analyze how trade openness matters for interstate conflict over productive resources. Our analysis features a terms-of-trade channel that makes security policies trade-regime dependent. Specifically, trade between two adversaries reduces each one’s incentive to arm given the opponent’s arming. If these countries have a sufficiently similar mix of initial resource endowments, greater trade openness brings with it a reduction in resources diverted to conflict and thus wasted, as well as the familiar gains from trade. Although a move to trade can otherwise induce greater arming by one of them and thus need not be welfare improving for both, aggregate arming falls. By contrast, when the two adversaries do not trade with each other but instead trade with a third (friendly) country, a move from autarky to trade intensifies conflict between the two adversaries, inducing greater arming. With data from the years surrounding the end of the Cold War, we exploit the contrasting implications of trade between enemies versus trade between friends to provide some evidence that is consistent with the theory.

Keywords: resource insecurity; interstate disputes; conflict; arming; trade openness; comparative advantage (search for similar items in EconPapers)
JEL-codes: D30 D74 F10 F51 F52 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-int
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Journal Article: Arming in the global economy: The importance of trade with enemies and friends (2020) Downloads
Working Paper: Arming in the Global Economy: The Importance of Trade with Enemies and Friends (2019) Downloads
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