Trade and Insecure Resources: Implications for Welfare and Comparative Advantage†

Abstract: We augment the canonical neoclassical model of trade to allow for interstate disputes over land, oil, water, or other resources. The trade regime in place has important implications for the costs of such disputes in terms of arming. Depending on world prices, free trade can intensify arming incentives 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