Trade and the Distribution of Power among Small Countries

Abstract: We augment the canonical 2x2x2 model of trade to allow for interstate disputes over land, oil, water, or other resources. The costs of such disputes in terms of arming depend on the trade regime in place. Under either autarky or free trade, the larger country (in terms of factor endowments) need not to be stronger militarily. Yet, under free trade, there is a stronger tendency for arming incentives to be equalized and thus “level the playing field. ” Depending on world prices, free trade in consumption goods can intensify arming to such an extent that the additional security costs swamp the traditional gains from trade and thus render autarky more desirable for one or both rival states. Furthermore, contestation of resources can reverse a country’s apparent comparative advantage relative to its comparative advantage in the absence of conflict. And, where such conflict is present, comparisons of autarkic prices to world prices could be inaccurate predictors of trade patterns