For a little over two weeks now, with the start of the invasion of Ukraine, many of us have wondered why the conflict could not have been avoided. The first war in Europe in the 21st century is definitely different from the wars of the past, due to the vast interconnections that connect our economies digitally and through international trade in goods and services and global value chains. However, although trade has promoted peace and prosperity throughout history, it doesn’t always work. This is the case of Russia, where democracy is absent, the leaders are irrational and the thirst for power blinds them to the disastrous consequences of war.
Economic theory tells us that the process of globalization has changed the nature of conflict. This conclusion was drawn in 2008 by Philippe Martin, professor of economics at the Institute of Political Studies in Paris, and his two co-authors. In their work, the researchers analyzed the aforementioned interconnections between trade and conflict, pointing out that wars can arise due to the existence of asymmetric information, that is, when one of the potential adversaries has more or better information than the other. In this case, the likelihood of conflict is higher between countries that do little bilateral trade, because the opportunity cost associated with trade losses is low. However, in assessing the likelihood of conflict, what matters is not only bilateral trade between the two countries involved, but also their trade openness to the rest of the world. For example, greater external openness, measured in terms of trade as a percentage of gross domestic product (GDP), reduces bilateral dependence and therefore the cost of bilateral conflict. Therefore, the authors conclude that external openness can increase the likelihood of bilateral conflicts with neighboring countries.
What can we learn from this theory if we apply it to the bilateral conflict between Russia and Ukraine? First, Russian President Vladimir Putin had more geostrategic information given the superiority of his army. Second, bilateral trade data indicates that Ukraine’s exports to Russia have fallen from 25% of total exports in 2012 to around 8% in 2020. This has been accompanied by an increase in trade with the European Union , which almost doubled its weight in Ukraine. exports in less than a decade. A similar trend can be seen in Ukrainian imports from Russia, which halved over the same period. Moreover, the geographical reorientation was not due to a change in the sectoral structure of trade, Ukraine maintaining a comparative advantage for the same products as 10 years ago.
Moreover, if we look at Russia’s trade openness, its foreign trade represented 46% of GDP in 2020, higher than that of other major emerging economies such as India (37%) or Brazil (25% ). In short, the weakness of bilateral trade and the non-negligible trade openness of the aggressor would have led us to conclude that the probability of a conflict was already very high in 2020. Unfortunately, unlike US President Joe Biden, European leaders didn’t believe it.
Obviously, the consequences of war for the economy and trade are disastrous, not only in terms of the massive destruction of physical and technological infrastructure, but also in terms of human capital. The most immediate consequences are already evident in the falling ruble and rising oil and commodity prices, which are affecting the global economy.
Finally, to return to the initial question and apply the theory in reverse, one could ask whether once the war has broken out, would it be possible to stop the aggressor by refusing to buy and sell goods and services on a massive scale? ? Although many companies and governments have already implemented these initiatives, including Shell and Zara, it is far from clear to what extent they will be able to strangle the Russian economy. We must not forget that Russia continues to export fossil fuels to Europe, and that China continues to trade with Russia, as do the former Soviet republics of Central Asia, among others. But could a trade embargo stop Putin? If the current trade cuts with Russia extend to energy products – which is unlikely in the short term – Russia’s trade openness would likely collapse, which means that if the theory works backwards, this vain war will soon cease.