Foreign trade, military alliance, and defence‐burden sharing

Abstract

This paper examines the trade and military relationship between two countries which have a common military enemy. The paper explains how the former two countries, which are military allies and trading partners, share the burden of defence against the third country. It demonstrates how the defence production of a country may hurt its ally because the latter country's terms of trade can be deteriorated. Whether or not a smaller ally spends less on defence is analyzed. Also analyzed is the effects of the reactions of the enemy country on the trade between the two allies and their welfare.