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Bombing trade to stop the war in Ukraine | Business

For just over two weeks, with the beginning of the invasion of Ukraine, many of us wonder why it could not be 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 link our economies both digitally and through international trade in goods and services and global value chains. However, despite the fact that trade has promoted peace and prosperity throughout history, this does not always work. This is what happens when there is no democracy, the leaders are irrational, as in Russia, and the desire for power blinds them to the disastrous consequences of war.

What economic theory tells us in this regard is that the process of globalization has changed the nature of conflicts. Philippe Martin, Professor of Economics at Science Po, and his two co-authors reached this conclusion in 2008. In their work they analyzed the aforementioned interconnections between trade and conflicts, pointing out that wars can occur due to the existence of asymmetric information; that is, when one of the potential opponents has more or better information than the other. In this case, the probability of conflict is greater between countries that trade little bilaterally, since the opportunity cost associated with trade losses is low. However, when evaluating the probability of conflict, not only bilateral trade between those involved in the conflict comes into play, but also the commercial opening of each country to the rest of the world. In fact, greater openness, measured in terms of trade as a percentage of GDP, reduces mutual dependency and thus the cost of a bilateral conflict. Thus, the authors conclude that trade liberalization can increase the probability of bilateral conflicts with neighboring countries.

What can we extract from this theory if we apply it to the conflict between Russia and Ukraine? First of all, Putin had more geostrategic information given the superiority of his army. Second, bilateral trade data indicates that Ukraine’s exports to Russia have risen from 25% of total exports in 2012 to around 8% in 2020. This has been accompanied by an increase in trade with the Union. Europe, which has almost doubled its weight in Ukrainian exports in less than a decade. A similar trend is observed in imports from Russia, which have been halved in that period. In addition, the geographical reorientation has not been due to a change in the sectoral structure of trade, since Ukraine still has a comparative advantage in the same products as it did 10 years ago. Finally, if we look at Russia’s commercial opening, its foreign trade represented 46% of GDP in 2020, a figure higher than that of other large emerging economies such as India (37%) or Brazil (25%). In short, scant bilateral trade and not inconsiderable trade openness by the aggressor would have led us to conclude that the probability of conflict was already very high in 2020. Unfortunately, unlike Joe Biden, European leaders did not believe it would happen.

Clearly, the consequences of the war for the economy and trade are dire, not only because of the massive destruction that they entail both of physical and technological infrastructures, but also in terms of human capital. The most immediate are already evident with the fall of the ruble and the increase in the prices of crude oil and raw materials, which affects the world economy.

Finally, returning to the initial question and applying the theory in reverse, we should ask ourselves if, once the war breaks out, it is possible to stop the aggressor by stopping buying and selling goods and services from him en masse. Although many companies and governments have already carried out these initiatives, including Shell and Inditex, it is not at all clear to what extent they will be able to strangle the Russian economy. It should not be forgotten that Russian energy exports to Europe continue to flow and that China continues to trade with the aggressor, as well as with other countries under its influence. But could a trade embargo stop Putin? Surely, if the drastic reduction in trade with Russia already underway were to extend to energy products imported from the EU —something unlikely in the very short term—, Russia’s trade openness would plummet and this useless war could end very soon.

He knows in depth all the sides of the coin.

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Immaculate Martinez-Zarzoso She is a professor at the universities of Göttingen and Jaume I.

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