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 in- centivize 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.