IDEAS home Printed from https://ideas.repec.org/p/lmu/muenec/15733.html
   My bibliography  Save this paper

Trade Costs, Conflicts, and Defense Spending

Author

Listed:
  • Seitz, Michael
  • Tarasov, Alexander
  • Zakharenko, Roman

Abstract

This paper develops a quantitative model of trade, military conflicts, and defense spending. Trade liberalization between two countries reduces probability of an armed conict between them, causing both to cut defense spending. This in turn causes a domino effect on defense spending by other countries. As a result, both countries and the rest of the world are better off. We estimate the model using data on trade, conflicts, and military spending. We find that, after reduction of costs of trade between a pair of hostile countries, the welfare effect of worldwide defense spending cuts is comparable in magnitude to the direct welfare gains from trade.

Suggested Citation

  • Seitz, Michael & Tarasov, Alexander & Zakharenko, Roman, 2013. "Trade Costs, Conflicts, and Defense Spending," Discussion Papers in Economics 15733, University of Munich, Department of Economics.
    • Handle: RePEc:lmu:muenec:15733
    as

    Download full text from publisher

    File URL: https://epub.ub.uni-muenchen.de/15733/1/Seitz_Tarasov_Zakharenko_2013.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Philippe Martin & Thierry Mayer & Mathias Thoenig, 2008. "Make Trade Not War?," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 75(3), pages 865-900.
    2. Reuven Glick & Alan M. Taylor, 2010. "Collateral Damage: Trade Disruption and the Economic Impact of War," The Review of Economics and Statistics, MIT Press, vol. 92(1), pages 102-127, February.
    3. Daron Acemoglu & Mikhail Golosov & Aleh Tsyvinski & Pierre Yared, 2012. "A Dynamic Theory of Resource Wars," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 127(1), pages 283-331.
    4. Faten Ghosn & Glenn Palmer & Stuart A. Bremer, 2004. "The MID3 Data Set, 1993—2001: Procedures, Coding Rules, and Description," Conflict Management and Peace Science, Peace Science Society (International), vol. 21(2), pages 133-154, April.
    5. Christian Broda & David E. Weinstein, 2006. "Globalization and the Gains From Variety," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(2), pages 541-585.
    6. Joshua Aizenman & Reuven Glick, 2006. "Military expenditure, threats, and growth," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 15(2), pages 129-155.
    7. Vicard, Vincent, 2012. "Trade, conflict, and political integration: Explaining the heterogeneity of regional trade agreements," European Economic Review, Elsevier, vol. 56(1), pages 54-71.
    8. Philippe Martin & Thierry Mayer & Mathias Thoenig, 2012. "The Geography of Conflicts and Regional Trade Agreements," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(4), pages 1-35, October.
    9. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
    10. Robert C. Feenstra & Robert E. Lipsey & Haiyan Deng & Alyson C. Ma & Hengyong Mo, 2005. "World Trade Flows: 1962-2000," NBER Working Papers 11040, National Bureau of Economic Research, Inc.
    11. Collier, Paul & Hoeffler, Anke, 2002. "Military expenditure - threats, aid, and arms races," Policy Research Working Paper Series 2927, The World Bank.
    12. Daron Acemoglu & Pierre Yared, 2010. "Political Limits to Globalization," American Economic Review, American Economic Association, vol. 100(2), pages 83-88, May.
    13. Morrow, James D. & Siverson, Randolph M. & Tabares, Tressa E., 1998. "The Political Determinants of International Trade: The Major Powers, 1907–1990," American Political Science Review, Cambridge University Press, vol. 92(3), pages 649-661, September.
    14. Marc J. Melitz & Giancarlo I. P. Ottaviano, 2021. "Market Size, Trade, and Productivity," World Scientific Book Chapters, in: Firms and Workers in a Globalized World Larger Markets, Tougher Competition, chapter 4, pages 87-108, World Scientific Publishing Co. Pte. Ltd..
    15. Marc J. Melitz & Gianmarco I. P. Ottaviano, 2008. "Market Size, Trade, and Productivity (DOI:10.111/j.1467-937x.2007.00463.x)," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 75(3), pages 985-985.
    16. Philippe Martin & Thierry Mayer & Mathias Thoenig, 2008. "Make Trade Not War?," Review of Economic Studies, Oxford University Press, vol. 75(3), pages 865-900.
    17. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-959, December.
    18. Mayer, Thierry & Zignago, Soledad, 2006. "Notes on CEPII’s distances measures," MPRA Paper 26469, University Library of Munich, Germany.
    19. repec:hal:spmain:info:hdl:2441/f4rshpf3v1umfa09lb0k114o5 is not listed on IDEAS
    20. Alesina, Alberto & Spolaore, Enrico, 2006. "Conflict, defense spending, and the number of nations," European Economic Review, Elsevier, vol. 50(1), pages 91-120, January.
    21. Solomon William Polachek, 1980. "Conflict and Trade," Journal of Conflict Resolution, Peace Science Society (International), vol. 24(1), pages 55-78, March.
    22. Polachek, Solomon W. & Seiglie, Carlos, 2007. "Trade, Peace and Democracy: An Analysis of Dyadic Dispute," Handbook of Defense Economics, in: Keith Hartley & Todd Sandler (ed.), Handbook of Defense Economics, edition 1, volume 2, chapter 31, pages 1017-1073, Elsevier.
    23. Stergios Skaperdas & Constantinos Syropoulos, 2001. "Guns, Butter, and Openness: On the Relationship between Security and Trade," American Economic Review, American Economic Association, vol. 91(2), pages 353-357, May.
    24. Gowa, Joanne & Mansfield, Edward D., 1993. "Power Politics and International Trade," American Political Science Review, Cambridge University Press, vol. 87(2), pages 408-420, June.
    25. Jonathan Eaton & Samuel Kortum, 2002. "Technology, Geography, and Trade," Econometrica, Econometric Society, vol. 70(5), pages 1741-1779, September.
    26. Douglas M. Stinnett & Jaroslav Tir & Paul F. Diehl & Philip Schafer & Charles Gochman, 2002. "The Correlates of War (Cow) Project Direct Contiguity Data, Version 3.0," Conflict Management and Peace Science, Peace Science Society (International), vol. 19(2), pages 59-67, September.
    27. HÃ¥vard Hegre & John R Oneal & Bruce Russett, 2010. "Trade does promote peace: New simultaneous estimates of the reciprocal effects of trade and conflict," Journal of Peace Research, Peace Research Institute Oslo, vol. 47(6), pages 763-774, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. João Jungo, 2024. "Institutions and economic growth: the role of financial inclusion, public spending on education and the military," Review of Economics and Political Science, Emerald Group Publishing Limited, vol. 9(3), pages 298-315, April.
    2. Garfinkel, Michelle R. & Syropoulos, Constantinos & Zylkin, Thomas, 2022. "Prudence versus predation and the gains from trade," Journal of Economic Theory, Elsevier, vol. 201(C).
    3. Christos Kollias & Suzanna Maria Paleologou & Panayiotis Tzeremes & Nickolaos Tzeremes, 2018. "The demand for military spending in Latin American countries," Latin American Economic Review, Springer;Centro de Investigaciòn y Docencia Económica (CIDE), vol. 27(1), pages 1-17, December.
    4. Ali Dadpay & Saleh S. Tabrizy, 2021. "Political Agreements and Exporting Activities: An Empirical Assessment of the Effects of the JCPOA Agreement on Iran’s Exports," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 63(1), pages 147-180, March.
    5. Albalate, Daniel & Bel, Germà & Mazaira-Font, Ferran A. & Ros-Oton, Xavier, 2024. "Paying for protection: bilateral trade with an alliance leader and defense spending of minor partners," Journal of Economic Behavior & Organization, Elsevier, vol. 223(C), pages 234-247.
    6. Garfinkel, Michelle R. & Syropoulos, Constantinos & Yotov, Yoto V., 2020. "Arming in the global economy: The importance of trade with enemies and friends," Journal of International Economics, Elsevier, vol. 123(C).
    7. Vincenzo Bove & Claudio Deiana & Roberto Nistic�, 2018. "Global Arms Trade and Oil Dependence," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 34(2), pages 272-299.
    8. Christos Kollias & Suzanna-Maria Paleologou, 2017. "The Globalization and Peace Nexus: Findings Using Two Composite Indices," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 131(3), pages 871-885, April.
    9. Khan, Hidayat Ullah & Rehman, Leena & Khan, Alam & Khan, Hameed, 2021. "Economics of Armed Conflicts and Governance: An Empirical Study Focusing on South Asia," Asian Journal of Applied Economics, Kasetsart University, Center for Applied Economics Research, vol. 28(2).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Head, Keith & Mayer, Thierry, 2014. "Gravity Equations: Workhorse,Toolkit, and Cookbook," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 131-195, Elsevier.
    2. Vincenzo Bove & Leandro Elia & Petros G. Sekeris, 2014. "US Security Strategy and the Gains from Bilateral Trade," Review of International Economics, Wiley Blackwell, vol. 22(5), pages 863-885, November.
    3. Benny Kleinman & Ernest Liu & Stephen J. Redding, 2024. "International Friends and Enemies," American Economic Journal: Macroeconomics, American Economic Association, vol. 16(4), pages 350-385, October.
    4. Garfinkel, Michelle R. & Syropoulos, Constantinos & Zylkin, Thomas, 2022. "Prudence versus predation and the gains from trade," Journal of Economic Theory, Elsevier, vol. 201(C).
    5. Dennis Novy, 2013. "Gravity Redux: Measuring International Trade Costs With Panel Data," Economic Inquiry, Western Economic Association International, vol. 51(1), pages 101-121, January.
    6. (ed.), 0. "Research Handbook on Economic Diplomacy," Books, Edward Elgar Publishing, number 16053.
    7. Hadjiyiannis, Costas & Heracleous, Maria S. & Tabakis, Chrysostomos, 2016. "Regionalism and conflict: Peace creation and peace diversion," Journal of International Economics, Elsevier, vol. 102(C), pages 141-159.
    8. Francesco Caselli & Massimo Morelli & Dominic Rohner, 2015. "The Geography of Interstate Resource Wars," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 130(1), pages 267-315.
    9. Fuchs, Andreas & Klann, Nils-Hendrik, 2013. "Paying a visit: The Dalai Lama effect on international trade," Journal of International Economics, Elsevier, vol. 91(1), pages 164-177.
    10. repec:hal:wpspec:info:hdl:2441/dambferfb7dfprc9m01g1j1k2 is not listed on IDEAS
    11. repec:hal:spmain:info:hdl:2441/dambferfb7dfprc9m01g1j1k2 is not listed on IDEAS
    12. Barry Eichengreen & Arnaud Mehl & Livia Chițu, 2021. "Mars or Mercury redux: The geopolitics of bilateral trade agreements," The World Economy, Wiley Blackwell, vol. 44(1), pages 21-44, January.
    13. Garfinkel, Michelle R. & Syropoulos, Constantinos & Yotov, Yoto V., 2020. "Arming in the global economy: The importance of trade with enemies and friends," Journal of International Economics, Elsevier, vol. 123(C).
    14. repec:spo:wpecon:info:hdl:2441/dambferfb7dfprc9m01g1j1k2 is not listed on IDEAS
    15. repec:spo:wpmain:info:hdl:2441/dambferfb7dfprc9m01g1j1k2 is not listed on IDEAS
    16. Michelle R. Garfinkel & Constantinos Syropoulos, 2015. "Trading with the Enemy," Working Papers 151603, University of California-Irvine, Department of Economics, revised Sep 2017.
    17. Yang-Ming Chang & Manaf Sellak, 2019. "A game-theoretic analysis of international trade and political conflict over external territories," Public Choice, Springer, vol. 179(3), pages 209-228, June.
    18. Parlow, Anton, 2011. "Does trade promote peace? squared: a gravity equation in a rectangular panel world," MPRA Paper 36430, University Library of Munich, Germany.
    19. Chen, Natalie & Juvenal, Luciana, 2022. "Markups, quality, and trade costs," Journal of International Economics, Elsevier, vol. 137(C).
    20. Han Dorussen & Hugh Ward, 2011. "Disaggregated Trade Flows and International Conflict," Chapters, in: Christopher J. Coyne & Rachel L. Mathers (ed.), The Handbook on the Political Economy of War, chapter 25, Edward Elgar Publishing.
    21. Bloom, Nick & Manova, Kalina & Teng Sun, Stephen & Van Reenen, John & Yu, Zhihong, 2018. "Managing trade: evidence from China and the US," LSE Research Online Documents on Economics 88703, London School of Economics and Political Science, LSE Library.
    22. Yang‐Ming Chang & Shih‐Jye Wu, 2020. "Insecure Resources, Bilateral Trade, and Endogenous Predation: A Game‐Theoretic Analysis of Conflict and Trade," Southern Economic Journal, John Wiley & Sons, vol. 86(4), pages 1338-1371, April.
    23. Costinot, Arnaud & Rodríguez-Clare, Andrés, 2014. "Trade Theory with Numbers: Quantifying the Consequences of Globalization," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 197-261, Elsevier.
    24. A. Kerem Co?ar & Nezih Guner & James Tybout, 2016. "Firm Dynamics, Job Turnover, and Wage Distributions in an Open Economy," American Economic Review, American Economic Association, vol. 106(3), pages 625-663, March.

    More about this item

    Keywords

    general equilibrium; gains from trade; defense spending;
    All these keywords.

    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F51 - International Economics - - International Relations, National Security, and International Political Economy - - - International Conflicts; Negotiations; Sanctions
    • H56 - Public Economics - - National Government Expenditures and Related Policies - - - National Security and War

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:lmu:muenec:15733. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Tamilla Benkelberg (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.