Bi-Weekly Geopolitical Report – Update on US and China Defense Spending (August 11, 2025)
by Patrick Fearon-Hernandez, CFA | PDF
In our Mid-Year Geopolitical Outlook, we reminded investors that President Trump’s import tariffs aren’t the only issue between the United States and China, despite the media frenzy surrounding them so far this year. We warned that even as the trade dispute persists, China is continuing to press for geopolitical advantage by beefing up its armed forces, pushing an all-of-nation effort to surpass the US in science and technology, and launching a diplomatic charm offensive to exploit the US’s weaker image as it cuts foreign aid, reduces its support for allies, and erects across-the-board trade barriers.
In this report, we focus on the US-China military rivalry from the perspective of “defense economics,” i.e., the impact of a country’s overall economic strength on its military effort and the impact of its military effort on the economy. Even though China is now facing significant, structural economic headwinds, we show that its high defense spending and relative fiscal flexibility will probably make it more challenging for the US to defend its position as the global hegemon. As always, we wrap up with the implications for investors.