This article examines the interaction of country pairs who have historically been and are potentially hostile. Hostility is described as a function of arms stocks versus bilateral trade. Armament intensifies the current level of hostility whereas trade reduces the possibility of militarized disputes. We argue that welfare-maximizing decisionmakers have to seek methods other than accumulation of arms to increase the security of their nations, and we highlight the strategic nature of trade in overcoming enmity. Rational governments, who consider bilateral trade as a factor that reduces the level of enmity, allocate resources more efficiently between arms imports and consumer goods. The model predicts that understanding the use of trade as a diplomatic tool will lead the economy to grow significantly. The model is designed as a non-cooperative dynamic game and solved numerically using an adaptive learning algorithm called a genetic algorithm.
Replication datasets available