Balance of Power Revisited: A Multi-Country Model of Trade and Conflict

A general multi-country model of trade and conflict is outlined and comparative static results for the number of countries are explored. Conflict is defined as a credible threat to use force to appropriate resources of another country. The model shows that, in general, trade reduces the incentives for conflict, but multi-country situations require important modifications. The pacifying effect of trade diminishes rapidly with a larger number of countries. The effect of trade on conflict is compared given different assumptions about the nature of conflict. Assuming that conflict does not lead to the elimination of the losing side, trade has the strongest deterrent effect if countries trade freely before conflict and are committed to not trading after conflict. Countries have, however, an interest in resuming trade. The connection between this commitment problem and security is then explored in the model from a balance-of-power perspective. The commitment not to trade with an adversary becomes more strained if an alliance is relatively weak or fragmented. In such circumstances, intra-alliance trade has to be more efficient.