Applied Micro Seminar : Every Tuesday
Time: 12:15 pm – 13:30 pm
Date: 11th of March
Room : 3001

Isabelle MEJEAN (Sciences Po) – “The Fragmentation Paradox : De-risking Trade and Global Safety co-authored”

Abstract :

“We develop a theory of international trade and interstate war that integrates 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 engage in diplomatic negotiations to attempt to resolve the disputes peacefully. In equilibrium, all the welfare-relevant geoeconomic factors—such as the costs of war, the cost of concessions required to avert war, and the probability of deescalation—depend on the observed trade flows. We quantify these factors in a general model of trade calibrated to current data. The model is then applied to study the historical evolution of geoeconomic factors for USA and China, as well as under prospective “decoupling” scenarios. Over time, the bargaining power of the US vis-à-vis China as deteriorated when the country has become increasingly dependent on China, while China was not opening as much to US products. In this setting, decoupling from China could be rational. The analysis however underscores the existence of a fundamental security dilemma: because trade dependencies influence bargaining power in negotiations, decoupling reduces the costs of diplomatic concessions needed to avoid war but can paradoxically increase the risk of escalation into armed conflict by weakening the incentives for disciplining negotiation. Overall, this quantitative framework provides insights for policymakers on determining the optimal level and instruments of decoupling.”

Organizers:
Benoît SCHMUTZ (Pôle économie du CREST)
Clément MALGOUYRES (Pôle économie du CREST)

Sponsors:
CREST