Inefficient Peace or Preventive War?

Abstract

We study a model of two-player bargaining game in the shadow of a preventive trade war that examines why states deliberately maintain trade barriers in the age of globalization. Globalization can induce substantial power shifts between states, which makes the threat of a preventive trade war salient. In this situation, there may exist "healthy" levels of trade barriers that dampen the war incentives by reducing states' expected payoffs from such a war. Thus, we demonstrate that trade barriers can sometimes serve as breaks and cushions necessary to sustain inefficient yet peaceful economic cooperation between states. We assess the theoretical implications by examining the US-China trade relations since 1972.