Trade Costs, Conflicts, and Defense Spending
b'This paper develops a quantitative model of trade, military conflicts, and defense\\nspending. Trade liberalization between two countries reduces probability of an armed\\nconict between them, causing both to cut defense spending. This in turn causes a\\ndomino effect on defense spending by other countries. As a result, both countries and\\nthe rest of the world are better off. We estimate the model using data on trade, conflicts, and military spending. We find that, after reduction of costs of trade between a pair of hostile countries, the welfare effect of worldwide defense spending cuts is comparable in magnitude to the direct welfare gains from trade.'