TRADE: The Fragmentation Paradox: De-risking Trade and Global Safety; Professor Thierry Mayer (Sciences Po)

Abstract

We set-up a model of international trade and interstate war that combines a quantitative model of trade with a diplomatic game of escalation to conflict. Bilateral disputes over a state-controlled public good arise exogenously and belligerent countries enter into a diplomatic negotiation to try settle the dispute peacefully. In equilibrium, all geoeconomic factors, i.e. the probability of appeasement, the utility cost of a conflict and the peace-keeping cost, depend on the opportunity cost of wars for belligerent countries. We quantify these costs in a general model of trade calibrated to current data. We then use the model to study the evolution of geoeconomic factors over time and under "decoupling'' scenarios. The analysis highlights the existence of a fundamental "security dilemma''. On the one hand, increasing import dependencies with geopolitical rivals can raise the  Opportunity Cost of War (OCW), potentially deterring the escalation of geopolitical  disputes into armed conflicts by exerting discipline during negotiations. However, if negotiations fail, the opportunity cost transforms into the actual cost of war, creating a fundamental tension.