This paper aims to analyze how military spending by China and the United States has affected bilateral trade between the two countries in the South China Sea over 2000–2024, focusing on how regional tensions caused by the maritime conflicts and military activities have affected bilateral trade. The study adopted a quantitative methodology, which used the World Bank annual report and other official records, measuring military spending in US dollars and the bilateral trade between the two countries. The study sample included the whole period between 2000 and 2024. Data analysis was done using Eviews and an OLS ordinary least squares model to test the hypothesis on the effect of military expenditure on bilateral trade. These results showed that the Chinese military spending had no significant effects on bilateral trade, but the US military spending had a negative and significant effect. The study found that tensions in the regions and the weaponry policies largely affect business, hence the suitability of political and safety factors in the dynamics of bilateral trade in the South China Sea. In theory, the work can be added to our knowledge regarding the economic, political, and security dynamics because it draws our attention to the correlation between the military expenditures and bilateral trade through the prism of hegemonic stability and interdependence.
The South China Sea is a waterway that is highly important and sensitive in the current international system, as it transports over a third of all oceanic trade, including crude oil, natural gas, manufactured products, and raw materials that form an important part of the East Asian and global economy. The geopolitical and economic value of this strategic position has made it the center of the interlaced regional and international conflicts over sovereignty over islands and the territorial sea, as well as the competition over the region’s rich marine resources. Due to this, any shift like security or military relations within this sea directly and indirectly impacts international trade and the stability of global supply chains (
Under this condition, China is emerging as an emerging power that is trying to gain its local and global influence through various means such as economic growth, engagement in international activities, and acquisition of military resources. This has seen it explode its defence budgets over the past decades, where Chinese military spending is often bigger in percentage than economic growth rates, and it is now the second largest military budget in the world after the United States. This has been attributed to increased military capabilities, which have been linked to strategic repositioning of China in the South China Sea, either by building artificial islands or increasing naval and air presence over disputed regions (
At the economic level, bilateral trade is regarded as a crucial sign of the effects of the military and political turmoil in the region. Increased geopolitical uncertainty among trading partners is likely to arise due to the growth of military presence and other activities associated with the defense in the area. However, the country’s economic direction is highly based on foreign trade; some of them could prefer to find other shipping options or rethink those long-term obligations. Meanwhile, the US military presence growth cannot be seen as the stabilizing factor all the time; instead, it can instill fear among economic actors because of the threat of military build-up or the use of mutual economic sanctions (
The topicality of the investigation of the relationship between military expenditure and bilateral trade within the South China Sea is based not only on the theoretical aspects, but also on the practical outcomes witnessed in the international arena over the past years. For example, the COVID-19 pandemic demonstrated the vulnerability of the global supply chains, and the conflict between Russia and Ukraine demonstrated how armed conflict in a distant location can directly impact the oil and food markets worldwide. Consequently, any escalation of military tensions between China and the United States in the South China Sea can have far-reaching implications for the two countries and the global economy.
The fact that the topic is important is evidenced by the theoretical controversies that have attempted to elucidate the relationship between military expenditure and economic growth or global trade. Some studies that have been carried out under the hegemonic stability theory hypothesis on the stability of trade are of the view that availability of a superpower who is capable of enforcing security; however, proponents of other theories, most of whom are premised on the complex interdependence theory argue that more military expenditure can be counterproductive as it may result in the rise of tension and the lack of trust between trading partners. This theoretical debate has revealed how delicate the relationship between security and economy is, and it is important to conduct applied research in a delicate region such as the South China Sea.
Research: The gap in the scholarly literature is huge in direct quantitative analysis of the effect of military expenditure on bilateral trade in the South China Sea. Most studies have focused on the security and politics of maritime disputes, as well as the consequences of militarization to the region’s stability. In the meantime, however, the relationship between economic indicators like bilateral trade and military expenditure has not been researched in detail, especially with the increasing Sino-US competition. Consequently, this paper will help to fill this gap through a quantitative method which utilizes new information and stringent statistical methods to determine how military expenditure in China and the United States affects bilateral trade.
It is likely that the study will contribute to the scholarly community as the researcher hopes that the study will shed light on the intricate processes that connect the military and economic aspects of the South China Sea. It is not only filled with theoretical theories on the effects of military spending but also intends to generate real information that will guide the decision-makers to determine the economic consequences of their security and military choices. It can also be used to strengthen intellectual and political arguments on whether to enhance defensive capability or maintain the circulation of international trade in the insecure regions.
Thus, the influence of both US and Chinese military expenditures on the bilateral trade between the countries in the South China Sea is a modern, multi-layered, and sophisticated topic that includes politics, economics, and international security. Real-life experience has shown that the strengthening of the military may sometimes lead to the opposite effect, disrupting the trade, increasing transportation and insurance costs and not helping to protect the economic interests and ensure the freedom of navigation as some might suppose. Therefore, this study aims at offering an in-depth study of the topic based on quantitative data and statistical models and relating findings to pertinent theoretical literature and past empirical studies. This helps to develop a better and more in-depth perspective of the interaction of security and the economy in one of the most critical areas on the planet.
The proposed study seeks to examine the relationship between the U.S and Chinese military spending and bilateral trade in the South China Sea in 2000–2024. We are testing two hypotheses, the first one is that US military expenditure brings about changes in bilateral trade and the second one is that Chinese military expenditure brings about major changes in bilateral trade. The research methodological contribution to the literature is its quantitative data analysis using the ordinary least squares (OLS) model; the philosophical contribution of the research to the literature is its ability to correlate the findings with the hegemonic stability and the complicated interaction that underlies the relationship between the economic policy and the military power.
This section covers prior studies regarding the correlation between military expenditure and bilateral commerce, emphasizing the influence of large powers on regional conflicts. This analysis examines the influence of maritime disputes and defense strategies on regional and global trade, emphasizing key findings and insights pertinent to the South China Sea setting.
Research on Chinese military spending and bilateral commerce indicates intricate links between defense spending, economic progress, and foreign partnerships.
With the yuan going toward a new equilibrium that might be attained within 15–40 years,
In his 2024 article, Dyah Sekar Arum examines the ways in which the rise of China’s military and economy have affected regional power dynamics and the approaches taken by Indonesia in matters of foreign policy and national security (
The maritime plan by Xi Jinping militarizes the territorial claim fortification process by erecting artificial islands and strengthening military infrastructure. In the mean time, he is expanding his influence at sea through the Belt and Road Initiative that is employed to promote economic interdependence and establish strategic interdependence (
Past research confirms beyond reasonable doubt that the Chinese military spending is inherently connected to the general strategic interests that do not limit to the economic factors but extend to the enhancement of maritime and commercial influence in the region and internationally. It has also been discovered that Beijing combines both hard and soft power in its quest to ensure trade routes and strengthen bilateral alliances by balancing both hard and soft power, which is evident in both the Belt and Road Initiative projects and its military ability enhancement. Such efforts are especially important when it comes to the South China Sea, as the maritime route is one of the most important strategic channels in the world and an important component in ensuring that bilateral trade continues with the United States and other key nations.
These analyses lead to the point that Chinese military spending does not limit itself to the simple strengthening of the defensive capacity. Rather, it is a tool to achieve a fait accompli in the maritime conflict zones and especially the South China Sea, through militarizing the islands and building of military facilities. Therefore, any consideration of the relationship between the Chinese military spending and bilateral trade should be placed into the context of maritime disputes and control over the shipping routes. The balance between maritime security and business development is the main parameter to understand the connections between the studied variables and make the South China Sea the most important geopolitical model to interpret the findings.
The literature offers different perspectives on the U.S. military spending and its relationship with bilateral trade and overall security matters.
The South China Sea is a strategic point of conflict between the United States and China to engage in military disputes, which makes the region very vulnerable to security issues and global maritime trade. China claims the South China Sea in 90% of its territory with its so-called nine-dash line and actively militarizes it, including the creation of military bases on the artificial islands and reefs, especially in the Spratly Islands (
The US maintains a proactive military presence in the South China Sea to reduce the territorial intrusion of China and maintain freedom of navigation, where it carries out operations to curb the construction of artificial islands and arming the region by the Chinese (
Studies conducted on the US military expenditure and bilateral trade reveal that the US does not use its defense budget as the sole mechanism of defending its interests within its borders and promoting the economy globally. Nevertheless, such military expenditure is also evident in the South China Sea. In order to compete strategically with china in this strategic maritime area, the United States is expediting its military spending on naval activities, consolidating allies in the region including the Philippines, and establishing alliances including the QUAD and AUKUS. Given the initiative by China to unilaterally seize the major waterways, such policies show that the correlation between military spending and trade is not restricted to only economics but also to the protection of the global business waterways and to the freedom of navigation.
The literature assumes that the military expenditure of the United States, though it is criticized on its effectiveness and its impact on the economy of the country, is a tactic in the control battle in the South China Sea. By creating a balance in the area militarily, Washington is betrayed to ensure that China does not grow and threatens the existing international maritime order. Due to such an approach, trade turns into an instrument of two-way pressure associated with security and military goals, altering the character of the relations between the two nations. The South China Sea, according to research, is not just a geopolitical hot spot but a meeting place of economic and security interests, where the military requirement of the United States meets its bigger business and strategic goals.
Regional tensions and maritime disputes profoundly affect international and regional trade through several mechanisms. Maritime disputes and geopolitical tensions undermine regional stability, impacting economic sectors such as tourism and incurring significant trade expenses (
In the Eastern Mediterranean, the aggressive maritime policy of Turkey led the region to unite in various ways to respond to disagreements, provoking evidence of how the change in the maritime force would deter foreign investment in maritime energy resources (
Research shows that regional tensions and maritime related conflicts have a major effect on international trade, disrupting supply chains, increasing shipping and insurance rates, and reducing investments in the transportation and energy sectors. This underscores the importance of a steady maritime transport in ensuring smooth flow of international and local trade. The South China Sea is a good example of how maritime disputes affect bilateral and international trade interactions, especially in the circumstances of the current tensions between China, the United States, and their allies.
According to the literature review, earlier literature has evaluated the Chinese and US military spending and its relationship with bilateral trade in various economic and strategic perspectives and also touched upon the role of regional tensions and maritime disputes on the stability of the international trade. However, most of these researches have been either generalized or focused on other areas without adequately addressing the military spending, sea wars and the regional politics of the two superpowers in the South China Sea. This study shows that Sino-US military competition, political and maritime disputes affect not only the balance of power in the region but also have an impact on trade routes and key maritime pathways.
This paper stands out by simultaneously analyzing the economic, political and military forces and relating both Chinese and US military spending to bilateral trade with the occurrence of regional tensions in the South China Sea. This association shows how the conflicts have influenced the freedom of movements, economic relationships and political choices in the region, as this has provided a gap in the current literature that has covered each of the characteristics separately rather than analyzing them as an analytical unit. This renders the study more important as it describes the interaction between military power, regional politics, and international trade.
Realism theory stresses the importance of military power and national security in world politics. Anarchism is considered one of the fundamental attributes of the international order, which forces governments to enhance their military power to protect their security. This hypothesis is an example of how the struggle to dominate key sea routes increases the states’ military spending and, therefore, influences bilateral and regional trade. It has been indicated that the increased military spending can be directly associated with the perceived security issues, and it demonstrates how countries strive to expand their defense capabilities in the context of local misfortunes (
The international political economics theory considers the relationship between politics and economics within the international system and how military activities relate to economic and trade policies. China and the United States have been observed to have military tensions in the South China Sea that affect bilateral trade policies as the two countries look into using economic and military power to achieve their political goals. According to literature, these dynamics can change the flows of trade and investment, proving the military strategy’s impact on the world economy (
The theory of maritime power illustrates the importance of controlling key maritime sea lanes to enhance national power. The ownership of the waterways in the South China Sea is critical to international trade, which forces countries to increase their military presence in the region. It is argued that the development of military bases and the strengthening of military forces have become part of countries’ national policies to protect their interests in both economy and security in this vital area (
The theory of regional security investigates how military crises between governments influence the general stability of the region. This theory shows the impact of the territorial differences in the South China Sea on collective security, which leads to changes in the trade and investment policies of the concerned states. According to literature, the above conflicts can lead to the formation of new alliances or the reconsideration of security and economic policies, which exemplifies the impact of regional security on trade dynamics (
The present paper examines how military spending by China and the United States affects bilateral trade in the current South China Sea tensions. The period between 2000 and 2024 was chosen due to the significant economic and military transformations that occurred during this period, as well as the aggravation of regional tensions.
This research is based on a quantitative analytical approach, making it easy to thoroughly study the cause-and-effect relationship among various variables and test the statistical hypothesis. The approach is suitable for quantifying the impact of military spending of China and the United States on the value of bilateral trade to examine the findings quantitatively.
The independent and dependent variables were gathered from credible sources. The World Bank and SIPRI database reports obtained military spending data from China and the United States. However, bilateral trade data of both countries were obtained from the World Trade Organisation (WTO) and the World Bank. All the data are normalized in United States dollars to ensure uniformity in analysis.
EViews software was used to test the data; the influence of the independent variables on bilateral commerce was determined using an ordinary least squares (OLS) model. The basic assumptions of the model such as normal distribution of residuals, the heteroscedasticity is zero, and the variables are not multi-collinear were also testified.
The purpose of the ordinary least squares (OLS) estimation in this research was not to prove a definitive long-term cause and effect connection. However, in light of the current geopolitical climate in the South China Sea, it is more useful as a linear approximation to investigate the short-run correlations between bilateral trade and military spending. The mixed integration orders of the variables should be taken into consideration so as to view the results as informative associations and not conclusive structural impacts.
To separate the security-related component of military spending from the overall picture of rising tensions in the South China Sea, this study uses a minimalist model specification. This omission of macroeconomic variables is intentional, despite the fact that they do influence bilateral commerce (especially in the aftermath of the 2018 trade war), including GDP, currency rates, and tariff regimes. The analytical emphasis would change from geopolitical signaling to more traditional trade determinants if these were included. However do our best to interpret the data with caution because we recognize that not including these factors is a limitation that could lead to omitted variable bias (
Source data, by author.
| Variable | Definition | Data source | Variable type |
|---|---|---|---|
| M China | Military china spending | WB, SIPRI | Independent |
| M USA | Military USA spending | WB, SIPRI | Independent |
| B T | Bilateral trade | WTO, WB | Dependent |
The equation used in the study expresses the relationship between the variables as follows:
The Jarque-Bera (JB) test is another standard statistical test that checks whether the data is normal by looking at skewness and kurtosis values.
This is an environmental analysis of the Jarque-Bera test in
Jarque-Bera test, by researcher, Eviews.
| Variable | China expenditure | USA expenditure | Bilateral trade |
|---|---|---|---|
| Probability | 0.2 | 0.1 | 0.06 |
Unit root tests are important methods for determining stationarity in time series analysis across several domains. The Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) tests are popular classical methods for finding unit roots. Proper unit root testing is required for accurate econometric modeling, forecasting, and policy choices (
The findings in
“ADF” and PP,” unit root test results, by researcher, Eviews 12.
| Variable | ADF | ||
|---|---|---|---|
| Prop | Prop | Prop | |
| China expenditure | 0.9 | 0.1 | 0.001 |
| USA expenditure | 0.007 | 0.000 | 0.000 |
| Bilateral trade | 0.5 | 0.00 | 0.000 |
| Variable | PP | ||
|---|---|---|---|
| Level | 1st difference | 2nd difference | |
| Prop | Prop | Prop | |
| China expenditure | 0.9 | 0.1 | 0.000 |
| USA expenditure | 0.009 | 0.000 | 0.000 |
| Bilateral trade | 0.9 | 0.000 | 0.000 |
Consequently, it can be inferred that the variables examined demonstrate varying levels of integration: Chinese military expenditure is second-order integrated (I(2)), US military expenditure is zero-order integrated (I(0)), and bilateral trade is first-order integrated (I(1)). The variation in stability necessitates prudence in selecting a standard model, as it may necessitate employing methods suitable for addressing variables integrated at disparate levels, such as cointegration tests, to guarantee the absence of false linkages within the model.
Recent study indicates the broad use of cointegration analysis in a variety of economic scenarios.
The findings of the Johansen cointegration test presented in
Johansson Cointegration test, by researcher, Eviews.
| Trace statistic | Critical value sig level = 0.05 | Hypothesized no. of CE(s) |
|---|---|---|
| 42.0 | 29.7 | Non* |
| 16.5 | 15.4 | At most 1* |
| 0.15 | 3.8 | At most 2 |
*Denotes rejection of the hypothesis at the 0.05 level.
The findings indicate that the three variables are co-moving in the long-run and maintain a constant equilibrium relationship. This implies that there exists a structural relationship between military spending by both China and the United States and the size of bilateral trade between the two countries, even though there are uneasy relationships in the South China Sea.
Johansen cointegration test is usually applied to examine variables, which are integrated to the same level, but, however, did not provide conclusive evidence of equilibrium relationships, the findings in this study are manifested as indicating the long-run co-movement. The outcomes of the cointegration analysis are viewed with a grain of salt and are designed to support not to dominate the entire empirical research due to the presence of variables with mixed integration order, particularly I(2).
After using the “OLS” method to estimate the parameters of the standard model in “Eviews 12,” the following results were obtained:
The results of the linear regression model in
OLS results.
| Variable | Coefficient | S.E | ||
|---|---|---|---|---|
| Constant | 2.21 | 0.6 | 3.60 | 0.001 |
| China expenditure | 0.42 | 0.38 | 1.1 | 0.27 |
| USA expenditure | −0.32 | 0.09 | −3.4 | 0.002 |
The outcomes of the model efficiency suggested that the value of R-squared was 0.59, which implied that military spending of both China and the United States explained approximately 59 percent of the variation in bilateral trade. Adjusted coefficient of determination (Adj R-squared) stood at 0.53 which showed the strength of the model. F-statistic is used to indicate the level of importance of the entire model at the 5 percent level since the
The results of the ordinary least squares model (OLS) show that the Chinese military expenditure did not have a significant influence on the bilateral trade in the South China Sea because the
The results indicated that US military expenditure negatively and significantly influenced bilateral trade since the
Theoretically, the results agree with the hegemonic stability theory’s assumption that militarization of conflict areas will not necessarily lead to economic or business stability, but the opposite, because of increased tension. Such conclusions are consistent with the principles of the so-called complex interdependence theory, according to which economic relations cannot be defined outside political and security factors, meaning that the advantages of trade integration can be impaired by maritime conflicts and tensions even within the framework of the already developed economic relationships.
The results supported the idea that US military spending negatively impacts bilateral trading between the countries in the region. The hypothesis on the positive impact of Chinese military spending was not supported because this variable was not significant. This conflict highlights the need to draw the line between the actions of different foreign powers in the South China Sea. The response of the US military might lead to some restrictions on trade, yet Chinese spending is not always associated with promoting commercial benefits.
The constrained Effect of Chinese military expenditure on bilateral trade. According to the results of the study, it is observed that Chinese military expenditure has not affected bilateral trade in the South China Sea in a significant way. It may be explained by the fact that despite the fact that China has enhanced its military forces, it has not demonstrated the seriousness to alter its trade policies or even impose limitations on its trading partners.
During the study period, China’s defense expenditures did not appear to have sent signals that disrupted commerce, as the effect of this spending was not statistically significant. This result can be attributed to China’s ongoing commitment to economic integration, growth driven by exports, and stability in its supply chain. These could have minimized ill will among counterparts of trade. The perception of Chinese military spending as defensive or locally contained keeps its direct impact on bilateral trade flows to a minimum, in contrast to the externally projected military spending of the United States, which can heighten perceived geopolitical risk.
Conversely, it was found that the negative and significant influence of the US military expenditure on the bilateral trade was also negative. This can be attributed to the heightened tensions in the region owing to the presence of the US military in the South China Sea that perhaps led to the reduction in the degree of trust of trading partners. Research has shown that the presence of the US military in war-ridden areas can cause business and supply chain disruptions. According to
The existence of regional tensions in the South China Sea, due to the maritime conflicts and the military action, can negatively impact trade between the affected countries. According to
This paper aims to investigate the effect of the military spending of China and the United States on bilateral trade in the South China Sea between 2000 and 2024 using an OLS model. The results support the claims that Chinese military spending had a minimal effect on bilateral trade, and US military spending had a harmful and considerable effect on the trading volume. These results are inherently analyzed in the context of the tensions in the South China Sea region because military actions destroy the trust between trading partners and destabilize supply chains. The results indicate that politics and security factors can substantially impact trade more than purely economic factors and theories of hegemonic stability and complex interdependence.
The results show that great nations’ military policies do not always directly impact trade; however, their impact depends on the situation in the region and political risks. The paper reiterates the importance of analysing the South China Sea as a case study that can illustrate how military tensions may undermine the economic gains, even though trading relations between countries are strong.
This work addresses a significant vacuum in the literature about the correlation between military expenditure and bilateral commerce, primarily within the context of the South China Sea, as prior research has not directly examined this relationship. This study examines the military expenditures of China and the United States, correlating them with bilateral commerce in this crucial region, thereby elucidating the impact of major countries’ defence policies on regional and worldwide trade dynamics. The study offers quantitative evidence through the OLS model, facilitating the interpretation of results and their comparison with established hypotheses and theories, including hegemonic stability theory and complex interdependence theory, which connect economic, political, and security dimensions.
The research offers significant recommendations for regional decision-makers and the principal powers engaged. Strengthening regional cooperation structures and shared governance is crucial for mitigating military tensions, safeguarding marine trade and supply lines, and fostering regional economic stability. Major nations are advised to implement military policies that account for potential economic and trade repercussions and to strive to alleviate tensions that may obstruct trade activities. The study also suggests that future research should incorporate additional variables, including geopolitical risks, maritime insurance, and oil price fluctuations, to deliver a more thorough and precise analysis of the factors affecting bilateral trade in the South China Sea.
The raw data supporting the conclusions of this article will be made available by the authors, without undue reservation.
AA: Project administration, Investigation, Formal analysis, Writing – review & editing, Funding acquisition, Supervision, Methodology, Writing – original draft, Data curation, Software, Validation, Resources, Conceptualization, Visualization.
The author thanks Jadara University for its ongoing financial and motivational support for scientific research.
The author(s) declared that this work was conducted in the absence of any commercial or financial relationships that could be construed as a potential conflict of interest.
The author(s) declared that Generative AI was not used in the creation of this manuscript.
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