Trade liberalization reduces countries' defense spending

Reducing trade barriers between countries reduces the likelihood of armed conflict and leads to a reduction in defence spending. In turn, this promotes a domino effect in relation to other countries, which has a positive effect on the situation in the world as a whole. This is the conclusion reached by Roman Zakharenko, Assistant Professor of the HSE International College of Economics and Finance, and his colleagues regarding the relationship between trade and defence spending.

In today's word, armed conflicts are not as frequent as they used to be, but defence spending remains high. 'Our idea was to explore the relationship between trade and defence spending and to show how reducing trade costs (barriers) between two countries affects defence spending', explains Zakharenko.

To examine the relationship between trade and defence spending, the researchers selected pairs of countries in a state of conflict over a significant period of history. To do this, the authors analyzed the history of relations between several countries from the 1950s to the early 1990s. 'Taking the United States and Canada, for example, was pointless, because they have never been in conflict', said Roman Zakharenko. Attention was focused on three pairs of countries: Israel and Jordan, North Korea and South Korea, and Russia and the United States.

Statistical analysis clearly showed how increased trade volumes affects defence spending. 'For example, if Israel and Jordan reduce trade costs so that the volume of trade increases by one dollar, defence spending in the world as a whole is reduced by 10 cents', said Zakharenko. The main volume of the reduction comes from countries participating trade relations - in this case, the total decrease in defence spending of Israel and Jordan is eight cents. The remaining two cents as a result of the so-called domino effect come from other countries associated with the feuding pair - the United States, Egypt, and Saudi Arabia.

The analysis thus suggests that reducing trade barriers can lead to a substantial reduction in defence spending. 'Every additional billion dollars traded between Russia and the United States leads to a reduction in defence spending in the world of 115 million dollars' says Zakharenko.

The research results are particularly relevant in terms of the existing sanctions war between Russia and the West. It is clear that trade barriers have increased - a consequence of the deteriorating political climate. However, an alternative policy leading to the reduction of trade barriers could contribute to the resolution of existing conflicts. 'Sanctions could have been even worse had Russia not entered the WTO. Incidentally, Georgian wines returned at the same time as WTO entry. It's possible that there would have been no sanctions at all had Russia joined the trade organization 10 years earlier', says Zakharenko. Thus, participation in international organizations and development of transport infrastructure, among other things, contributes to reducing political tensions.

In the course of the study, the researchers used publicly available information on all countries around the world, including the Correlates of War (USA) and the Stockholm International Peace Research Institute databases. Existing data on trade and defence spending from 1993 to 2001 were used to study relations directly. The study has been published in the Journal of International Economics.