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Paying for Protection: Bilateral Trade with an Alliance Leader and Defense Spending of Minor Partners

Author

Listed:
  • Daniel Albalate

    (Department of Economics, Statistics & Applied Economics. John Keynes 1-11, 08034 Barcelona. +34934021943, Spain.)

  • Germà Bel

    (Department of Economics, Statistics & Applied Economics. John Keynes 1-11, 08034 Barcelona, Spain. + 34934021946)

  • Ferran A. Mazaira-Font

    (Department of Economics, Statistics & Applied Economics. John Keynes 1-11, 08034 Barcelona. + 34934021943.)

  • Xavier Ros-Oton

    (Department of Mathematics & Informatics. Gran Via de les Corts Catalanes 585, 08007 Barcelona, Spain. + 34934039330)

Abstract

Military spending was the main government expenditure until the 20th century, and it still represents a significant fraction of most governments' budgets. We develop a theoretical model to understand how both military and trade alliances with military leaders can impact defense spending. By increasing the costs of military aggression by a non-ally, an alliance reduces the probability of war and allows minor partners reducing their military spending in exchange for a stronger trade relationship with an alliance leader and a higher trading surplus for the latter. We test our hypotheses with data on 138 countries for 1996–2020. Our results show that the importance of the trade relationship and the trade balance with the military alliance leader is a significant driver of military spending. The greater the weight of trade with the military leader and the higher its trade surplus, the lower is the defense spending of the minor partner.

Suggested Citation

  • Daniel Albalate & Germà Bel & Ferran A. Mazaira-Font & Xavier Ros-Oton, 2023. "Paying for Protection: Bilateral Trade with an Alliance Leader and Defense Spending of Minor Partners," IREA Working Papers 202317, University of Barcelona, Research Institute of Applied Economics, revised Nov 2023.
    • Handle: RePEc:ira:wpaper:202317
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    References listed on IDEAS

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    More about this item

    Keywords

    Military alliances; Trade; Defense spending. JEL classification: H56; F19; F50; D74.;
    All these keywords.

    JEL classification:

    • H56 - Public Economics - - National Government Expenditures and Related Policies - - - National Security and War
    • F19 - International Economics - - Trade - - - Other
    • F50 - International Economics - - International Relations, National Security, and International Political Economy - - - General

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