Sanctions, taxes and arms testing

Are sanctions the most efficient means for convincing a nation to stop arms tests that pose a security threat? We incorporate sanctions in a Robert Kohn model of international trade, likening security threats to global pollutants. First-order conditions for maximizing the utility of representatives of trading nations suggest that Pigouvian taxes may contain the threats more efficiently than sanctions can. One problem is that the sanctions may have unintended effects on the composition of the economy of the sanctioned nation. Suppose that in this nation the nondefense sector is labor-intensive and the defense sector is capital-intensive. Samuelson’s variant of the Heckscher-Ohlin model predicts that the sanctions imposed on nondefense products will reduce their price relative to the price of military products. Since nondefense production is labor-intensive, the wage relative to the rent will fall. This induces a rise in the labor-to-capital ratio in both industries. As nondefense prices decline, workers in that sector migrate to the military, reducing wages there. Since the price of military goods rises, relative to that of other goods, relative demand for military capital rises, increasing rent. This attracts capital from the nondefense industry, raising rent there. Capital owners gain, including military leaders. The rise in the military’s economic power may increase its political power as well. This may reduce the probability that military leaders will suspend arms testing. In an application to North Korea, econometric models support the Heckscher-Ohlin analysis only modestly. On one hand, despite the Heckscher-Ohlin prediction, an increase in the military share of gross domestic product (GDP) does not increase the number of arms tests significantly, holding constant the type of regime. On the other hand, as the military share of GDP rises, the positive impact of the Kim Jong Un regime on the number of tests increases significantly, which is consistent with the Heckscher-Ohlin model. General economic sanctions against Kim might reduce the number of tests. On the back of an envelope, we estimate that a fall in income equivalent to about 7% of 2014 GDP might have eliminated all testing in 2015, controlling for the head of regime. Data sources include the Bureau of Arms Control, Verification and Compliance of the U.S. Department of State; the Center for Strategic and International Studies (CSIS) Missile Defense Project; and the national bank of South Korea.