When Do “Relative Gains” Impede Trade?

Abstract

Neorealists argue that states may refuse mutually profitable trade because of concern about “relative gains.” If one state profits more than another, the latter may fear the former will use its advantage to dominate it. However, the relative gains argument ignores states' ability to respond to external threats by arming. If a state does not spend its entire gain from trade on the military, it is better off with trade than without. Unless states spend a large fraction of the gain from trade on the military, the division of benefits must be very unequal for either state to spend all its gain on the military. Concern with relative gains, then, should not block trade even between rivals; therefore, the conclusion of the relative gains argument does not follow from its premises. The author analyzes this point with a formal model of the enforceability of trade agreements by examining three types of goods.