U.S. Security Strategy and the Value of 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 militarized interstate disputes (MIDs)to proxy the national security interests. This paper 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 empirically by using newly constructed data on U.S. troop deployments,bilateral foreign military financing (FMF) and bilateral trade 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 findings suggest a stronger relationship between trade and flag than in the traditional models.