Trade and Geopolitics

Abstract

Since the Age of Discovery, the world has grown integrated economically while remaining disintegrated politically as a collection of nation states. The nation-state system is robust because borders, as state dividers, interact with economic integration to absorb shocks. We build a tractable general equilibrium model of international trade and national borders in the world. Over a longer time horizon, declining trade costs alter trade volumes across states but also incentivize states to redraw borders, causing states to form, change, and be dissolved. Our model offers rich implications for global geopolitics, including political geography, its interplay with natural geography, state-size distribution, and the frequency and nature of military disputes. These implications are supported by historical data.