The Relationships Between Oil, Critical Minerals, and Military Expenditure: Evidence from the U.S. and China

This paper investigates the interplay between oil, critical minerals, and military expenditure in the U.S. and China. The research goal is to evaluate how sensitive the military expenditure of these countries is to shocks in energy markets. It develops a stylized dynamic model of the arms race and conflict, with a particular focus on U.S.–China tensions surrounding access to these vital resources. Empirical analysis using VAR estimations reveals that: (1) shocks to China’s military spending prompt increases in U.S. military expenditure, whereas the reverse effect is not observed; (2) critical mineral production significantly influences China’s military spending; and (3) U.S. military expenditure is affected by both Chinese military spending and fluctuations in oil prices.