Trade Policy for Dual-Use Technology

ABSTRACT

We consider trade policy for a private market good that is also valuable for the production of military force. In a two-country model with both contested and uncontested resources, we show necessary and sufficient conditions for the importing country to restrict trade with quota and subsidy combination in equilibrium. Equilibrium can involve subsidization by the exporting country with equilibrium total of the importing country increasing in this subsidy.

KEYWORDS:

• Trade
• Tariffs
• Dual-Use Technology
• Strategic Competition
• Quotas

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Notes

1. See for example: Adams (2018), Barfield (2021), Congressional Research Service report IF11897 (2021), Goodman (2021), Hunter (2018), Rasser and Lamberth (2021), Roberts, Moraes, and Ferguson (2018), and Werner (2018).

2. See for example Defense Science Board Task Force (2005).

3. For example the entire treatment of the most prominent graduate textbook in international trade Feenstra (2016) does not consider the problem of insecure international property.

4. Some important contributions to this literature include Charles, Anderton, and Carter (1999), Skaperdas (1992), Skaperdas and Syropoulos (2002)), Anderson and Marcouiller (2005), Acemoglu et al. (2012), Garfinkel and Skaperdas (2007) and Garfinkel, Skaperdas, and Syropoulos (2015).

5. An export quota can be useful as a way to take advantage of the nation’s market power to improve terms of trade. In our model this would only occur when the value of contested resources between the two nations is sufficiently small compared to the gains from trade of such a policy. Since we are interested in the baseline free trade case in which the importer has no production base and the value of the contested resources is relatively large, we gain parsimony by this omitting the export quota from the formal model.

6. The reason that country 1ʹs consumers of buy from country 2 producers first in the case that $p_1=p_2$ is purely technical, as it closes the model so that the equilibrium is in pure strategies. A different, more cumbersome, modeling choice that results in an arbitrarily close equilibrium to ours, is to discretize the set of prices to an arbitrary fine finite space.