Trade controls on dual-use goods
Maxim Alekseev and Xinyue Lin, in this paper, develop a comprehensive framework to understand how governments should regulate “dual-use” goods—items that serve both civilian and military purposes—by building a quantitative trade model and using extensive data on defense contracts, global production networks, and trade policies. The researchers constructed their analysis in two main stages. They began with a basic two-country trade framework, then incorporated a defense department that purchases goods and embedded military competition into national welfare calculations. This was then expanded to include multiple countries and sectors, allowing for complex production chains, price adjustments, and broader economic effects. Alekseev and Lin developed a comprehensive measure of military importance for over 5,000 different products by combining U.S. defense procurement data with trade elasticity information. This creates a scale from 0 to 1 indicating how militarily relevant each product is. They validated their military-use index against official dual-use goods lists from the EU and U.S. export controls, achieving strong correlations. Finally, the model was calibrated to analyze a potential U.S.-China conflict scenario using 2018 economic data. This involved estimating the value countries place on military advantages and understanding how military spending scales with security threats.
Findings
- Policy targeting effectiveness
Current export controls concentrate on goods with high military importance and low substitutability, which aligns well with the model’s recommendations for optimal policy. Since 2022, as geopolitical tensions increased, both EU and U.S. measures have expanded to include goods with lower military centrality. - Trade response to conflicts
During the Ukraine war, dual-use imports within allied countries effectively received significant trade advantages, while imports from adversaries faced substantial penalties. This occurred on top of broader shifts affecting all goods, demonstrating how security concerns reshape trade patterns. - Policy impact assessment
Unilateral U.S. export controls provide modest improvements in military advantage against China, but coordinated controls with allies triple this effectiveness. Import tariffs work differently for each country, being more effective for the U.S. than for China. Importantly, domestic industrial policy proves five times more effective than trade policy because most defense production occurs domestically. - Economic cost-benefit analysis
The research suggests that the value societies place on higher probability of military victory significantly outweighs annual consumption losses, justifying substantial trade restrictions when security tensions are high. The estimated value of winning a conflict equals approximately 2.5 times annual U.S. GDP. - Strategic insight
Military interests function like a powerful economic lobby group. When security stakes rise, optimal policy shifts away from purely economic considerations toward taxes specifically targeting militarily critical goods. This provides a framework for understanding why trade policy increasingly incorporates security considerations.
Trade Policy in the Shadow of Conflict: The Case of Dual-Use Goods
Authors: Maxim Alekseev, Xinyue Lin
From: Harvard University
