Is the arms race between the PRC and Taiwan simply a myth? The long-run and causal relationship between their defence spending ratios

Abstract

This article investigates the long-run and causal relationship between the defence spending-GDP ratios of the People's Republic of China and Taiwan. The results clearly indicate that there is a long-run level equilibrium relationship between the ratio of defence spending of mainland China and that of Taiwan. The estimated long-run relationship shows that this level relationship is negative, indicative of a convergence phenomenon for the defence spending ratios of the two rivals. Moreover, causality test results substantiate that there is neutrality between the defence spending ratios of the PRC and of Taiwan in the short run but long-run causality running from Taiwan to the PRC. Based on the causality results, it is concluded that there is no arms race between the PRC and Taiwan.

Acknowledgements

I would like to thank Prof. Mark Taylor and anonymous referees of this journal for helpful comments and suggestions. The usual disclaimer applies.