Guns, Butter, and Openness: On the Relationship Between Security and Trade

Sovereign states arm to defend real or hypothetical interests, presumably because they cannot engage in complete, long-term contracting that would prevent such arming. International trade, therefore, takes place within an essentially anarchic context, and we can expect trade regimes and security policies to be related. Indeed, many embargoes, sanctions, and various other forms of trade restrictions that have been used throughout history and continue to be used today can be considered extensions of security policies, whereas some security policies can be attributed to trade policy. The relationship between trade and security, however, has been barely explored within economics. We could fairly characterize the prevailing view within the discipline as the classical liberal view, according to which the expansion of international trade does not just increase the welfare of the trading partners, but can also patch up any differences they might have over other contentious issues. (Solomon Polachek [1980] represents a rare articulation of this widely held perspective.) More boldly, it could be argued that the expansion of trade always alleviates conflict by forcing the adoption of measures that manage conflict. Nevertheless, one does not need to dig much into history to show that, while trade and economic interdependence can contribute to the peaceful resolution of disputes, they are not sufficient by themselves to guarantee the absence of war and the reduction of arming. Many observers before World War I, for example, considered that the hitherto unprecedented expansion of trade and interdependence between Britain and Germany made war unthinkable and impossible, yet war occurred and with much ferocity and destruction. Furthermore, as Donald Kagan (1995 pp. 373–80) has argued, the British policy of appeasement toward Germany during the 1930’s was based on similar arguments about the use of economic carrots to avoid war. What can interfere with peace and arms reduction when trade expands is what some political scientists have called the “security externality of trade” (Joanne Gowa, 1994). Trade changes the incentives for (and can increase) arming to an extent that its cost may outweigh the benefits of openness. Such effects are behind the view of the realist and neorealist schools of international relations, according to which countries may impose trade restrictions because of security considerations. To begin discussing the classical liberal and realist views we analyze a simple model that allows for possible insecurity as well as trade. We examine an economic environment in which two “small” countries dispute a resource that can be used in the production of tradables. Claims on the resource are developed through arming. We analyze the effects of different trade regimes on arming and on the welfare of each country. In the model we consider, one effect we find is that trade, by equalizing the prices of traded goods, equalizes the marginal benefits and opportunity costs of arming for two interacting countries and thus “levels the playing field” for arming. Then, the incentives for arming can be very different in the presence of trade than under * Skaperdas: Department of Economics, University of California, Irvine, CA 92612; Syropoulos: Department of Economics, Florida International University, Miami, FL 33199. We thank Gary Richardson and Scott Taylor for very useful comments. Syropoulos thanks the FIU/Provost Foundation for a summer grant, and Skaperdas thanks the GPACS Center for financial support. 1 Recent research that has considered aspects of the relationship between security and trade has analyzed Ricardian models in which international trade is insecure, either because of the presence of pirates and bandits (James Anderson and Douglas Marcouiller, 1997) or because the two sides influence the terms of trade through arming (Charles Anderton et al., 1999). Both of these papers show that autarky is an equilibrium for fairly large sets of parameters and therefore make the basic point that much international trade can be hampered by the anarchy that characterizes international relations. Models like that of Jack Hirshleifer (1988), suitably adapted, could also make the same point. In a different vein, Martin McGuire (2000) has examined the effects of supply uncertainties on trade policy.