Trade and military spending in Taiwan

Taiwan’s security has attracted international attention in recent years, yet little attention has been devoted to Taiwan’s counterintuitive defense spending. While confronting a rising Mainland China, Taiwan has been cutting military spending since the early 1990s. We propose a novel argument that trade drives Taiwan’s defense spending. Since Mainland China often interprets an increase in Taiwan’s military spending as a signal towards independence, the fear of losing the benefits from cross-Strait trade makes the Taiwanese government reluctant to raise defense spending. To empirically assess our argument, we conduct a comparative study of competing hypotheses at the aggregate level and a survey experiment at the individual level. The findings uniformly demonstrate that trade with Mainland China reduces Taiwan’s defense spending. Meanwhile, the common belief that Taiwan’s military spending is driven by the U.S.-China rivalry receives no empirical support.