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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 conflict 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/15742/1/404.pdf
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Paper provided by Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich in its series Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems with number 404.

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Date of creation: 01 Jul 2013
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Handle: RePEc:trf:wpaper:404
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  1. Polachek, Solomon W. & Seiglie, Carlos, 2007. "Trade, Peace and Democracy: An Analysis of Dyadic Dispute," Handbook of Defense Economics, Elsevier.
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  9. HÃ¥vard Hegre & John R Oneal & Bruce Russett, 2010. "Trade does promote peace: New simultaneous estimates of the reciprocal effects of trade and conflict," Journal of Peace Research, Peace Research Institute Oslo, vol. 47(6), pages 763-774, November.
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  12. Marc J. Melitz & Gianmarco I. P. Ottaviano, 2008. "Market Size, Trade, and Productivity," Review of Economic Studies, Oxford University Press, vol. 75(1), pages 295-316.
  13. Marc J. Melitz & Gianmarco I. P. Ottaviano, 2008. "Market Size, Trade, and Productivity (DOI:10.111/j.1467-937x.2007.00463.x)," Review of Economic Studies, Oxford University Press, vol. 75(3), pages 985-985.
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  16. Thierry Mayer & Mathias Thoenig & Philippe Martin, 2012. "The Geography of Conflicts and Regional Trade Agreements," Sciences Po publications info:hdl:2441/f4rshpf3v1u, Sciences Po.
  17. Douglas M. Stinnett & Jaroslav Tir & Paul F. Diehl & Philip Schafer & Charles Gochman, 2002. "The Correlates of War (Cow) Project Direct Contiguity Data, Version 3.0," Conflict Management and Peace Science, Peace Science Society (International), vol. 19(2), pages 59-67, September.
  18. Vincent Vicard, 2006. "Trade, Conflicts, and Political Integration: the Regional Interplays," CESifo Working Paper Series 1839, CESifo Group Munich.
  19. Daron Acemoglu & Mikhail Golosov & Aleh Tsyvinski & Pierre Yared, 2011. "A Dynamic Theory of Resource Wars," NBER Working Papers 16682, National Bureau of Economic Research, Inc.
  20. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-59, December.
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  23. Spolaore, Enrico & Alesina, Alberto, 2006. "Conflict, Defense Spending, and the Number of Nations," Scholarly Articles 4553016, Harvard University Department of Economics.
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