A game-theoretic analysis of international trade and political conflict over external territories

For analyzing conflict between two large open countries over external territories rich in natural resources, we develop a game-theoretic model of trade under resource appropriation possibilities. We show that greater trade openness (by lowering trade costs) reduces the overall intensity of arming when the adversary countries are symmetric in all dimensions. This finding is consistent with the liberal peace hypothesis that trade reduces conflict. We further analyze how equilibrium is affected by differences in national resource endowments. The resulting asymmetric equilibrium reveals that arming by the more endowed country exceeds that of the less endowed country and the two adversaries respond to lower trade costs differently: the more endowed country cuts back on its arming, whereas the less endowed country may increase it. Under resource endowment asymmetry, the aggregate arming allocations of the adversaries could increase despite greater trade openness.