Endogenous Security, Third-Party Trade, and Interstate Disputes : A Conflict-Theoretic Analysis

This paper examines third-party trade and its implications for conflicts between hostile countries not engaging in trade. We present a conflict-theoretic model to analyze two adversaries' endogenous arming decisions when they separately establish a free trade agreement (FTA) with a neutral third-party state. We contrast this multiple FTAs regime with a single FTA regime between one adversary and the third party state, which excludes the other adversary as a non-member. In our analysis, the benchmark case is a protectionist regime when the bilateral trade between the third-party state and each of the adversaries is a tariff war. Among the three trade regimes, we show that the two adversaries' aggregate arming is the lowest under multiple FTAs, but is the highest under a single FTA. These results suggest that, despite no trade between two adversary countries, multiple FTAs through third-party trade have the pacifying or appeasing effect of lowering overall military buildups in interstate conflicts