The Impact of U.S.-China Relations on Taiwan`s Military Spending, 1966-92: An Analytical Error Correction Model

Abstract

This study seeks to address Taiwan’s security in general and to investigate the variation of Taiwan s military spending in particular Previous research has shown that Taiwan r military security is affected by both China’s military buildup and the US. military pipeline. This study investigates whether the ongoing U.S-China relationship also affects the island’s security. Three major findings are derived from the statistical analyses. First and foremost, the level of conflict between the United States and China has a positive effect on the increase of Taiwan’s military spending. Second, the volatility of US.-China relations has a negative effect on Taiwan ‘s military spending; this finding suggests that instability in US-China relations will prompt Taiwan to decrease its military spending due to a higher amount of perceived security on the one hand, with Taiwan also desiring to avoid further provoking China on the other. Third, analyses indicate that an error correction model (ECM) fares better than a simple budgetary incremental model (BIM) in explaining the re-equilibrating effects of GNP growth on Taiwan’s military spending.