Conflict and agreement in the collective choice of trade policies: implications for interstate disputes

From the collective choice perspective, this paper examines how different trade regimes have differing implications for two enemy countries' arming decisions in a three-country world with a neutral third-party state. We compare the two adversaries' aggregate arming (i.e., overall conflict intensity) and show that it is in ascending order for the following regimes: (i) a free trade agreement (FTA) between the adversaries, leaving the third-party state as a non-member, (ii) worldwide free trade in the presence of the interstate conflict, (iii) trade wars with Nash tariffs, and (iv) an FTA between the third country and one adversary, excluding the other adversary from the trade bloc. These results have policy implications for interstate conflicts. First, “dancing between two enemies” with an FTA results in lower aggregate arming than under worldwide free trade. Second, the world is “more dangerous” in tariff wars than under free trade. Third, an FTA between one adversary and the third party while keeping the other adversary as an outsider is conflict-aggravating since aggregate arming is the highest compared to all other trade regimes. We also analyze aggregate arming under a customs union (CU) and discuss differences/similarities in implications between a CU and an FTA for interstate conflicts.