Free Trade and Arms Races

To examine the effect of free trade between two potential political rivals on their respective accumulation of weapons, the authors use a model in which utility maximization, the economics of trade and comparative advantage, production of weapons and consumption goods, depreciation of weapons stocks, technological spillover from production to national security, and the accumulation of capital are represented in an infinite horizon setting. In a neoclassical two-goods model of trade, each actor specializes in producing the good of its comparative advantage and engages in trade. Each country derives positive utility from consumption and its own stock of weapons. The impact of the foreign country's weapons stock on the home country's utility is negative (in the case of rivals). The authors use dynamic optimization to show that whether free trade leads to a rise or a decline in each country's stock of weapons relative to no trade depends on the relative marginal utilities of the consumption goods and weapons.