U.S. Security Strategy and the Gains from Bilateral Trade

The relationship between trade and foreign-policy goals has led to growing debates in the field of international economics and international relations. Most studies are cross-national and use interstate disputes to proxy the national security interests. We focus on the U.S., the world’s largest trading nation and a global power. While the U.S. has deployed more forces abroad and in more countries than any other nation in the world history, it is also the largest contributor of military aid to foreign countries. Troops and weapons are expensive tools of foreign policy and can serve to explore the geo-strategic determinants of bilateral trade flows between the U.S. and the rest of the World, in times of peace and armed conflict. We develop a three-party model of security and trade patterns and validate its predictions through an augmented log gravity model and newly constructed data on U.S. troop deployments and bilateral foreign military financing (FMF) on the 1950-2010 period. We find that both tools have significant, positive impacts on the shares of bilateral trade between the U.S and the recipient country, results that are robust to other known causes of trade and endogeneity issues. Moreover, our corrected model specification leads to a stronger relationship between trade and foreign policy goals than in the traditional models.