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Trade in the Shadow of Power

  • Michelle R. Garfinkel

    ()

    (Department of Economics, University of California-Irvine)

  • Stergios Skaperdas

    ()

    (Department of Economics, University of California-Irvine)

  • Constantinos Syropoulos

    ()

    (Department of Economics and International Business, Drexel University)

In this chapter, we examine how some of the main results in international trade theory fare when we abandon the traditional assumption of third-party enforcement of property rights. Without such enforcement, countries arm and exercise power to secure resources used in production or to secure the output from that production. Because arming is endogenous and takes scarce resources to produce, the production of final goods is also endogenous. Consequently, prices in either domestic or international markets reflect not only preferences, endowments or technologies of production as predicted by traditional models, but also arming and the power that comes from that. As we show in the context of a Ricardian model, those countries that produce the most socially valued goods tend to arm less, giving them a "comparative disadvantage" in power. Accordingly, the level of welfare obtained by these countries could be lower than that obtained in a competitive economy with perfect security. In the context of a Heckscher-Ohlin model, we find that free trade need not be preferred to autarky, as the costs of conflict or self-enforcement swamp the familiar gains from trade for a certain range of world prices. Finally, trade in the shadow of power can distort comparative advantage.

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File URL: http://www.economics.uci.edu/files/docs/workingpapers/2010-11/garfinkel-5.pdf
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Paper provided by University of California-Irvine, Department of Economics in its series Working Papers with number 101105.

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Length: 27 pages
Date of creation: Nov 2010
Date of revision: Jan 2011
Handle: RePEc:irv:wpaper:101105
Contact details of provider: Postal: Irvine, CA 92697-3125
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Web page: http://www.economics.uci.edu/

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  1. Michael McBride & Gary Milante & Stergios Skaperdas, 2011. "Peace and War With Endogenous State Capacity," Journal of Conflict Resolution, Peace Science Society (International), vol. 55(3), pages 446-468, June.
  2. Michelle R. Garfinkel & Stergios Skaperdas & Constantinos Syropoulos, 2005. "Globalization and Domestic Conflict," International Trade 0507005, EconWPA.
  3. Skaperdas, S. & Syropoulos, C., 2000. "Guns, Butter, and Openness: On The Relationship Between Security and Trade," Papers 00-01-23, California Irvine - School of Social Sciences.
  4. Francis Bloch, 2009. "Endogenous formation of alliances in conflicts," Working Papers hal-00435387, HAL.
  5. Pedro Dal bó, 2004. "Workers, Warriors and Criminals: Social Conflict in General Equilibrium," Econometric Society 2004 Latin American Meetings 341, Econometric Society.
  6. Michelle R. Garfinkel & Stergios Skaperdas & Constantinos Syropoulos, 2011. "Trade and Insecure Resources," Working Papers 111201, University of California-Irvine, Department of Economics, revised Sep 2013.
  7. Skaperdas, Stergios & Syropoulos, Constantinos, 1997. "The Distribution of Income in the Presence of Appropriative Activities," Economica, London School of Economics and Political Science, vol. 64(253), pages 101-17, February.
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