Trade in the Shadow of Power

Michelle Garfinkel, Stergios Skaperdas and Constantinos Syropoulos ()

No 101105, Working Papers from University of California-Irvine, Department of Economics

Abstract: In this chapter, we examine how some of the main results in international trade theory fare when we abandon the traditional assumption of third-party enforcement of property rights. Without such enforcement, countries arm and exercise power to secure resources used in production or to secure the output from that production. Because arming is endogenous and takes scarce resources to produce, the production of final goods is also endogenous. Consequently, prices in either domestic or international markets reflect not only preferences, endowments or technologies of production as predicted by traditional models, but also arming and the power that comes from that. As we show in the context of a Ricardian model, those countries that produce the most socially valued goods tend to arm less, giving them a "comparative disadvantage" in power. Accordingly, the level of welfare obtained by these countries could be lower than that obtained in a competitive economy with perfect security. In the context of a Heckscher-Ohlin model, we find that free trade need not be preferred to autarky, as the costs of conflict or self-enforcement swamp the familiar gains from trade for a certain range of world prices. Finally, trade in the shadow of power can distort comparative advantage.

Keywords: Trade openness; Property rights; Interstate disputes; Conflict (search for similar items in EconPapers)
JEL-codes: D30 D70 D72 D74 F10 F2 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2010-11, Revised 2011-01
New Economics Papers: this item is included in nep-int
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Citations: View citations in EconPapers (5)

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Related works:
Working Paper: Trade in the Shadow of Power (2014)
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