Research Questions: To what extent does:
-- conflict in other regions affect the U.S. economy, even when the United States remains a nonbelligerent state?
-- U.S. military engagement abroad suppress conflict, impact U.S. peacetime trade and investment with other countries, and increase U.S. economic welfare?
Scholars of grand strategy debate the merits of U.S. forward military presence and alliances. The authors of this report explore one element of this debate: the potential economic benefits of these security policies. The authors draw on the existing literature to identify possible pathways through which U.S. forward military presence and alliances could lead to economic benefits.
In theory, these pathways include preventing conflicts that disrupt U.S. trade and investment, reducing fears of war that could inhibit peacetime exchange, and increasing U.S. bargaining leverage over security partners in economic negotiations. In practice, the United States has higher levels of bilateral trade with and investment in allied countries. Importantly, however, the existing literature has not evaluated whether this increase in bilateral trade and investment benefits the U.S. economy as a whole. The authors develop a new model that provides evidence that U.S. alliances increase bilateral trade in manufactured goods and that this has a modest but positive effect on U.S. economic welfare.
Decisions about U.S. alliances and forward military presence should be based on a range of factors beyond these possible economic benefits. This report does not examine other pathways through which economic benefits may accrue or costs may arise — or effects on allies' and adversaries' behaviors — and therefore does not make recommendations as to whether or how the United States should change its security policies. Instead, the report describes potential economic benefits associated with U.S. military engagement, which should inform a broader assessment of the U.S. approach to the world.
-- U.S. alliances are associated with higher levels of trade and investment in allied countries, but scholars have not previously established whether alliances lead to more trade or whether the United States is more likely to ally with key trading partners.
-- Economists have not previously assessed whether higher levels of bilateral trade and investment with allies increases overall U.S. trade and investment and, ultimately, economic welfare or if it instead diverts economic activity from other, non-allied countries.
-- The authors' new model of the relationship between alliances, bilateral trade in manufactured goods, and U.S. economic welfare suggests that the North Atlantic Treaty Organization alliance is associated with higher levels of trade, which has had a modest positive effect on the U.S. economy.
-- The authors are unable to assess with confidence the extent to which renegotiating or withdrawing from some existing U.S. alliances — a policy recommended by some advocates of a grand strategy of restraint — would reverse these gains and hurt the U.S. economy.
-- There are examples of the United States and other powerful countries using military engagement to gain leverage in economic negotiations, but the effects of such cases on the U.S. economy are unknown.
-- Foreign military conflicts impose adjustment costs on the U.S. economy, but analysts have not fully evaluated the extent to which conflicts like the war in Ukraine affect U.S. economic welfare.
Recommendations -- Analysts should:
-- continue to assess whether military engagement increases bilateral trade and investment activity with U.S. allies and partners, and if so, how. It is unclear whether military engagement changes the behavior of partner governments, changes firm incentives, or both.
-- examine how U.S. alliances and forward presence affect U.S. economic welfare, not just intermediate outcomes, such as bilateral trade and investment.
-- compare the economic impacts of military engagement with other policies, such as free trade agreements.
-- assess the extent to which ending alliances decreases bilateral trade.
-- assess the adjustment costs that firms face as they seek new economic partners and attempt to better understand the economic effects of foreign wars on the U.S. economy.