Trade and insecure resources

• Published in: Journal of international economics Vol. 95; no. 1; pp. 98 - 114
• Main Authors: Garfinkel, Michelle R., Skaperdas, Stergios, Syropoulos, Constantinos
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01.01.2015; Elsevier Sequoia S.A
• Subjects: Civil war; Comparative advantage; Comparative analysis; Conflict; Economic theory; Equilibrium; Free trade; Game theory; International disputes; Interstate disputes; Prices; Prisoner's dilemma; Property rights; Security policies; Studies; Trade; Trade openness; Interstate disputes; D30; D74; F52; F51; F10; Conflict; Property rights; Security policies; Trade openness
• ISSN: 0022-1996; 1873-0353
• DOI: 10.1016/j.jinteco.2014.10.001

We construct a model of conflict and trade to study the consequences of interstate disputes over contested resources (land, oil, water or other resources) for arming, welfare and trade flows. Different trade regimes imply different costs of such disputes in terms of arming. Depending on world prices, free trade can intensify arming to such an extent that the additional security costs it brings swamp the traditional gains from trade and thus render autarky more desirable for one or all rival states. Free trade, though, is always an equilibrium, and sometimes is a dominant one with features of a prisoner's dilemma outcome. 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. •We study the effects of resource insecurity in a neoclassical trade model.•For certain world prices, a shift from autarky to free trade is welfare reducing.•Even so, free trade can be the unique dominant-strategy equilibrium.•Resource insecurity can reverse a country's comparative advantage.•Differences between world and autarkic prices can be poor predictors of trade patterns.