Political alliances like NATO and the China-Russia backed Shanghai Cooperation Organisation (SCO) are not only important from a defence perspective. They also have important economic implications, not least given their potential to reshape the geopolitical and economic landscape.
In a recent study, we examine the trade-offs associated with military alliances in the current geopolitical context. We address two critical questions. First, how would European trade and welfare be affected by stronger alliances within blocs and the expansion of NATO? Second, what are the potential trade and welfare consequences of the US withdrawing from NATO and its subsequent disintegration?
The effect of NATO
Among the active defence alliances, NATO is the largest in terms of the economic and military power of its members. Our analysis suggests that membership in NATO positively and significantly impacts export levels above the impact of a generic military alliance.
The positive effect of NATO on trade may come from several sources: protecting and securing trade routes, lowering uncertainty and boosting investments across member countries, direct trade of military and military-related products, and support of military activities. In terms of generic defence agreements, our results suggest that they are likely to have a negative impact on trade. This could be due to the specific economic and political characteristics of NATO as compared to other defence alliances.
Scenarios
We consider the impact of changes in the political environment measured by military alliances on bilateral trade costs. Our scenarios focus on NATO, as European security strongly relies on it, and EU countries are the main beneficiaries of the current security arrangements. EU and NATO enlargements represent two parallel timelines of integration and security, with distinct membership criteria and geopolitical implications.
In scenario 1, we model Sweden and Finland’s NATO accession. This is a major well-documented policy shift away from neutrality for both countries, however, the trade and welfare impacts are not well understood. Scenario 2 considers only Ukraine joining NATO (not Sweden and Finland), as well as the EU. The third scenario assumes that Ukraine joins NATO but not the EU. This allows us to disentangle the effects stemming from military and economic co-operation.
Scenario 4 assumes all three countries (Finland, Sweden and Ukraine) join NATO and Ukraine joins the EU. In the case of scenario 5, we assume that Donald Trump withdraws the US from NATO after regaining the presidency. Our additional scenarios consider the extreme benchmark of NATO disintegrating (scenario 6) and the deepening of the SCO to become a military alliance (scenarios 7-9).
Expanding SCO membership from the core members to observers to dialogue partners, we demonstrate how the benefits of joining a military alliance change with the alliance size. Finally, scenario 10 considers a 25-member SCO military alliance and the complete disintegration of NATO.
Results of the simulations
These simulations underscore the complex relationship between political alliances and global trade, where changes in military and political alliances, such as NATO and the SCO, could have profound impacts on global economic performance, trade flows, and regional economies. EU countries, in particular, are expected to benefit from the NATO accession of Finland, Sweden and Ukraine. On the other hand, the withdrawal of the US, further disintegration of NATO or deepening of the SCO alliance are all expected to negatively impact EU trade and welfare.
Notably, the accession of smaller countries to NATO emerges as economically beneficial, revealing that the boost to their economies from increased trade likely outweighs the 2% GDP defence spending requirement, essentially making NATO membership self-financing. Conversely, while a hypothetical US exit from NATO would negatively impact its members, the simulations suggest such an event would not be catastrophic. However, the potential disintegration of NATO could have severe economic repercussions, far exceeding the costs of maintaining the alliance.
Takeaways
Alliances foster economic interconnections that are not limited to defence cooperation. Notably, our findings indicate the benefits of NATO membership extend significantly beyond those of generic defence alliances, which at times may even negatively affect trade.
Our research underscores the critical role of political alliances, particularly NATO, in shaping global trade patterns and economic outcomes. As the world navigates a period of heightened geopolitical tensions and shifting alliances, understanding these dynamics remains paramount for policymakers and scholars alike. Future research should continue to explore the economic dimensions of political alliances, considering their direct impacts on trade and their broader implications for global economic stability and prosperity.
About the authors:
Karen Jackson is a Reader in Economics at the University of Westminster.
Oleksandr Shepotylo is a Senior Lecturer in Aston Business School at Aston University.