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Trade Costs, Conflicts, and Defense Spending

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

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.

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File URL: http://epub.ub.uni-muenchen.de/15733/1/Seitz_Tarasov_Zakharenko_2013.pdf
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Paper provided by University of Munich, Department of Economics in its series Discussion Papers in Economics with number 15733.

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Date of creation: 01 Jul 2013
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Handle: RePEc:lmu:muenec:15733
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  1. Alan M. Taylor & Reuven Glick, 2005. "Collateral Damage: Trade Disruption and the Economic Impact of War," Working Papers 515, University of California, Davis, Department of Economics.
  2. Vincent Vicard, 2008. "Trade, conflicts and political integration : explaining the heterogeneity of regional trade agreements," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00270618, HAL.
  3. Christian Broda & David E. Weinstein, 2006. "Globalization and the Gains from Variety," The Quarterly Journal of Economics, MIT Press, vol. 121(2), pages 541-585, May.
  4. Thierry Mayer & Soledad Zignago, 2011. "Notes on CEPII’s distances measures: The GeoDist database," Working Papers 2011-25, CEPII research center.
  5. Daron Acemoglu & Pierre Yared, 2010. "Political Limits to Globalization," NBER Working Papers 15694, National Bureau of Economic Research, Inc.
  6. Philippe Martin & Thierry Mayer & Mathias Thoenig, 2008. "Make Trade Not War?," Review of Economic Studies, Oxford University Press, vol. 75(3), pages 865-900.
  7. Polachek, Solomon & Seiglie, Carlos, 2006. "Trade, Peace and Democracy: An Analysis of Dyadic Dispute," IZA Discussion Papers 2170, Institute for the Study of Labor (IZA).
  8. 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.
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