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Defense Alliances and International Trade

The objective of this note is to illustrate the impact of defense alliances on international arms trade. By differentiating between the income and price effects that are associated with the formation of international alliances, it is possible to consider the involvement of alliance member countries in international arms trade. The availability of a world market for armaments enables alliance members to encash the spillover benefits created by alliance formation. When alliance members make a significant contribution to world trade, the impact upon the international terms of trade affects the gains from membership. Should allied countries engage in trade management, they may affect the distribution of such membership benefits. An analysis of interalliance trade in armaments suggests a distinction between world efficiency and alliance efficiency. Allied countries exporting armaments may have an incentive to trade with other allies at a reduced price rather than trade with the rest of the world.