Planning for the Short Haul: The Formation of Wartime Commercial Policy Mariya Grinberg
[email protected] Draft paper prepared for IPES, November 18, 2017. Please do not cite or circulate without permission of the author. In times of war, why do belligerents continue to trade with each other? There are two countervailing forces that affect this decision. On the one hand, conventional wisdom in economics holds that states have absolute gains from trade. Therefore, economic considerations should push states to engage in mutually beneficial trading relationships, regardless of the security environment. In other words, states should always trade with the enemy. On the other hand, conventional wisdom in international relations holds that trading with a security adversary has negative security externalities. A state can use these benefits from trade to increase its military capabilities which, in turn, can be used in the war effort against the state it is trading with. Thus according to security considerations, states should never trade with the enemy. Empirically, it is possible to see wide variation in the choices states make about their wartime commercial policy. Some states chose to continue their trade throughout the war, for example India and Pakistan in the Kargil War (1999) or Yugoslavia and Croatia in the War of Bosnian Independence (1992). Other states chose to cut off trade immediately at the start of the war, for example India and Pakistan in the Second Kashmir War (1965) or England and Argentina in the Falkland Islands War (1982). Yet other states start off trading with the enemy only to change course during the war and sever the commercial relationship in the middle of the conflict, as for example occurred in the Iran-Iraq War of 1980.