rade Policy in the Shadow of Conflict: The Case of Dual-Use Goods

Maxim Alekseev and Lin Xinjue

No 2502, CEPREMAP Working Papers (Docweb) from CEPREMAP

Abstract: Policymakers increasingly use trade instruments to address national security concerns. This paper studies optimal policy for dual-use goods—items such as semiconductors or drones that have both military and civilian applications. We begin by empirically documenting that the regulation and trade flows of dual-use goods respond to changes in the security environment over time. To put structure on the defense externality, we introduce military procurement into a multi-country general equilibrium network model and add a military contest to the national welfare function. In a simple two-country case, optimal export taxes depend on a trade-off between the good’s military centrality and its distortion centrality. Military centrality is a network-adjusted sales share to the foreign military; distortion centrality reflects taxation misallocation in the domestic economy from roundabout imports. Using U.S. defense procurement data, we construct a measure of military use across goods, which ranges from zero to one, by scaling the U.S. closed-economy military centrality by import demand elasticities. Our measure effectively evaluates policy restrictions and military content in trade flows. To quantify the macroeconomic magnitude of the consumption-security trade-off, we calibrate our model to a potential U.S.-China conflict. The revealed preference estimate of the value placed on the probability of winning the conflict equals 2.5 times the annual U.S. GDP.

Keywords: Trade Policy; International Trade Organizations, Optimal taxation, Networks, Military (search for similar items in EconPapers)
Pages: 100 pages
Date: 2025-04
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Persistent link: https://EconPapers.repec.org/RePEc:cpm:docweb:2502

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