“Show me the money” is the mantra of those analyzing Chinese defense budgets, searching for every defense dollar hidden behind state-owned defense enterprises and construction projects. But perhaps what they should be asking is, “where’s the beef?”
Every traveler knows that money is only as good as what it can buy. What you find on the dollar menu on one side of the border may cost $2.05 on the other. A lack of this purchasing-power-parity perspective is a major flaw in standard comparisons of annual defense spending. Analysis of the U.S. and Chinese defense budgets should not concentrate on dollar-vs-dollar, but rather the meat of what those budgets can buy.
For a quick non-scientific assessment of defense budgets weighted by purchasing-power, we look to the Big Mac Index (BMI, no pun intended). In 1986, the Economist developed the BMI as a humorous way of gauging the accuracy of currency valuations world-wide. What started out as educational humor became a serious academic endeavor. The BMI is so effective that the infamous currency manipulating government of Argentina’s Cristina Fernández de Kirchner has passed laws regulating the sale and marketing of the Big Mac. Although the Economist has produced a “gourmet” version controlling for local factors such as differences in labor costs, it is those local market defects that make the raw BMI appropriate for defense budget analysis – the analysis is not of currency on the exchange floor, but on the shop floor.
According to the Stockholm International Peace Research Institute, China‘s raw defense budget of $166 billion is a mere 24% of the American defense budget at $682 billion (including so-called OCO funds for the Iraq and Afghanistan wars). In order to gain the purchasing power perspective, we can compare the budgets using the respective countries’ Big Mac Index prices – $2.61 in China and $4.56 in the United States. Weighted with the BMI, China’s defense budget value is 42% of its American rival, the equivalent of $287 billion.
Depending on what source you use, the comparison worsens. A raw dollar-to-dollar comparison of DOD’s maximum assessment of China’s defense budget ($215 billion) and the U.S. budget without war funding ($593 billion) shows China at 35% of the U.S. level. Once you weight the budgets with the BMI index, the Chinese defense budget emerges at a robust 63% of the U.S., the equivalent of $376 billion.
The BMI is by no means a perfect method of showing the value-for-money comparison of Chinese and U.S. defense budgets. After all, burgers aren’t bombers, and fries aren’t frigates.
But using such purchasing power parity measures provides a useful perspective as the dirge of sequestration starts to play. The BMI illustrates how the value-for-money calculation tilts toward China. So, too, are the missions and challenges to which the value is applied. Because of its extensive cyber program and other means of industrial espionage, China must spend far less on R&D as it steals and copies designs and doctrines from its more advanced competitors. China’s anti-access/area denial (A2/AD) focus provides a financial asymmetry as well as a technological one. After all, a DF-21 “carrier killer” missile is far cheaper than the U.S. supercarrier it’s designed to strike.
Secretary Hagel has noted that half of U.S. defense spending is obligated to pay, benefits, and retirement – not training, supplies, capital investment, procurement, or R&D as many assume. China does not treat their personnel nearly so well. Moreover, these “people costs” are consuming an increasing share of the defense dollar. Army Chief of Staff Ray Odierno recently predicted that compensation would consume 80% of the Army’s budget by 2023.
The BMI does hold out one glimmer of hope: the McDonald’s Theory of International Relations holds that no two nations hosting a McDonald’s franchise will ever go to war. But in the Asia-Pacific of the 21st Century, the United States cannot afford to rely on Mayor McCheese to guarantee the peace.
LT Matthew Hipple is the Executive Officer of PC Crew INDIA and the Director of the NEXTWAR blog. He is also a member of the U.S. Naval Institute and a contributor to Proceedings. While his opinions may not reflect those of the United States Navy, Department of Defense, or US Government.
Twitter: @AmericaHipple
The following article is special to our International Maritime Shipping Week. While we often discuss the threats to maritime shipping, this week looks at dangers arising from such global trade, and possible mitigations.
“Where the carcase is, there will the eagles be gathered together.”
Julian S. Corbett, Some Principles of Maritime Strategy (1911)
In a global system marked above all by its complexity and interconnectedness, dependence on international shipping is universal. Yet some nations are far more vulnerable than others. As students of naval history well know, such vulnerability is often turned into a source of strategic leverage. To what extent can this leverage actually be exploited under 21st century conditions?
The needs of a nation, the opportunity of a foe
The globalized economy is, in a very real sense, a system of maritime exchange. As Thomas Friedman points out, as much as any other recent innovation, it was the shipping container that shaped our daily lives by making the economic transformation of the late 20th Century possible.[1] In the past two decades alone, the volume of sea-borne commerce has more than doubled, from 4 billion tons in 1990 to 8.7 billion tons in 2011. According to the International Maritime Organization, if the overall trend of trade growth observed over the last one and a half centuries continues, the figure will be 23 billion tons in 2060. And, while the exact share of global trade in goods that is moved by is a matter of some debate, it is sea well in excess of 75 percent by most reckonings. Further, it is clear that only cheap and plentiful shipping in a secure maritime environment can sustain this transformation. As a result, the stakes in international shipping are widespread.
But while any nation that wishes to prosper in the current global environment shares in the global dependency on shipping, the vulnerabilities that arise from it are distributed unevenly. This is mainly for two reasons: First, the degree to which specific nations sustain themselves by means of ship-borne imports, and to which they found their prosperity upon maritime exports, varies greatly. Secondly, depending inter alia on a country’s geopolitical setting, it will be more or less able to manipulate the degree to which it has to rely on shipping for its economic security. A resource-rich, continental-size state with landward access to sizeable markets – like Russia – has serious alternatives to maritime transportation. A small island nation with an export-oriented economy that runs on imported hydrocarbons – such as Taiwan – does not. It is where dependency gives rise to vulnerability that it turns into a potential source of leverage for outside powers.
Targeting Shipping for Strategic Effect
In what ways can vulnerabilities in the area of maritime transportation be exploited for strategic effect? There is, of course, a whole spectrum of options available to would-be-predators. Unilateral or multilateral sanctions have been a mechanism of choice since the end of the Cold War. But historically, it has been direct military action against the opponent´s shipping that has had the greatest impact on trade. Two main methods of waging war on commercial shipping can be distinguished, at least at an analytical level: (1) the blockade, and (2) guerre de course, or commerce raiding. The blockade relies on concentration and persistence to choke off the flow of sea-borne goods into enemy harbors, and as such will usually require some form of command of the sea. Commerce raiding, on the other hand, relies on dispersed, attritional attacks by individual vessels (or small groups of vessels), which makes it an attractive option for navies that find themselves in a position of inferiority. Both methods leverage the disruption of shipping to impose a cumulative toll on the adversary’s economy, which is expected to have a significant indirect impact on the war effort and/or erode the opponent´s will to resist.
Historical examples of shipping being turned into a strategic lever are abundant. In the age of sail, preying on adversaries’ commerce was an integral part of most naval campaigns, including those of the Dutch Wars, the Seven Years’ War, and the Wars of the French Revolution. While it was seldom decisive, it was often “exceedingly painful,”[2] as Colin Gray observes. During the late 19th and early 20th centuries, innovations in naval technology all but brought to its termination the “close blockade” of enemy harbors while also providing means – the submarine, torpedo, and naval mine – that would transform guerre de course into a method of total warfare. Much ink has been spilled on Germany’s failed – and strategically counterproductive – attempts subdue Britain by way of Handelskrieg (the German variation of commerce raiding), while a slightly more specialized literature focuses on the “distant blockades” of Germany that were a key feature of British naval operations in both World Wars. However the case of Japan is most the instructive for the purposes at hand.
An island nation with an extremely circumscribed resource base, Japan was utterly dependent on ship-borne imports of a range of raw (and precursor) materials. In a very real sense, the Empire´s huge naval modernization program during the 1930s was based on its maritime commerce with the United States. Among other things, the U.S. covered 80 percent of Japanese liquid fuel needs. Given its political and military trajectory, Japan´s demand for key commodities was highly inelastic. The only alternative to trade with the United States and other potential adversaries was the unilateral extraction of resources from Japan´s near abroad – which could decrease its dependence on this particular foreign power, but (crucially) not on maritime transportation. When war came, the U.S. was able to exploit this vulnerability to devastating effect. Despite the many operational and technical inadequacies revealed by its initial operations in 1941-42, the U.S. Navy´s all-out war on Japanese shipping eventually came as close to strategically decisive as can reasonably be expected from any indirect use of military power.[3] Aided by the dire lack of defensive measures on the part of the Imperial Japanese armed forces, U.S. submarines alone sent more than 1,100 Japanese merchantmen to the bottom, and nearly as many were sunk by aircraft and mines. By the spring of 1945, Japanese sea-borne logistics had virtually ceased to exist, and so had Japan´s ability to sustain its war effort.
It has been suggested that other attempts throughout history at disrupting shipping flows might well have been equally successful in exploiting strategic vulnerabilities, had it not been for the predators´ “technical incapacity, operational ineptitude, and policy incompetence […] in the conduct of commerce raiding.”[4] Whether this assessment is accurate or not, there is little doubt that – despite the moral opprobrium that has often accompanied attacks on civilian vessels – the vulnerable dependence on sea-borne trade can be exploited to considerable effect. What relevance this finding might possess in an era of global economic integration is, however, much less clear.
Execute against China?
Until very recently, the explosion of maritime trade supporting economic globalization has not resulted in a resurgence of military strategies based on the (selective) disruption of international shipping. An important exception has been Iran´s focus on the Strait of Hormuz, which has played a critical role in Iranian strategic thinking since the 1980s. But it is the rise of China that has reignited naval strategists´ interest in shipping as a source of strategic vulnerability.
One set of scenarios that has been debated in detail involves Chinese offensive operations against Taiwan´s economic lifeline. Given the island´s vulnerable dependency on shipping and the enduring limitations of the People´s Liberation Army with regard to a full-scale invasion, it is hardly surprising that the imposition of a coercive blockade should hold some appeal in PLA planning circles.
Considerably greater attention has been attracted, however, by the possibility that the People´s Republic might itself become the target of offensive military action against the sea-borne commerce on which the integrity of its economic model stamds. After all, 90 percent of China’s exports and 90 percent of its liquid fuel imports – which, as Sean Mirski observes are “functionally irreplaceable”[5] – are transported by sea. The oft-cited ‘Malacca dilemma’ is but one expression of a suspicion that now unites an increasing number of strategic thinkers, both Chinese and foreign: namely, that its dependence on maritime transportation may prove to be China´s Achilles’ heel on its way to greatness.
While the vulnerability of the PRC’s sea lines of communications has become an official justification for naval expansion and a rallying cry for naval nationalists, it is also a focal point for U.S. strategizing in the context of increasing access challenges in the Western Pacific. Thus, a blockade of Chinese (or rather China-bound) shipping has been debated both as an element of, and as an alternative to, the AirSea Battle Concept that is designed to enable operations in the face of an anti-access/area-denial challenge, such as U.S. military planners anticipate in case of conflict along the Chinese periphery.
While Western treatments of the subject tend to agree that a blockade would be militarily feasible – given an adequate investment of resources – and could have a very considerable impact on the Chinese economy, the assumptions under which they arrive at these conclusions are extremely restrictive. For example, Mirski assumes that (1) the U.S.-China conflict in question would not be limited in scope, yet would stop well short of nuclear use, (2) the U.S. would find itself in the position of defender of the status quo against a blatantly aggressive China, (3) the U.S. would be able to build a coalition that includes Russia, India, and Japan; and (4) under these conditions, a ‘sink-on-sight’ policy towards civilian vessels in China’s near seas would be politically viable. Even with these preconditions, he concludes that despite the American blockade “China would be able to meet its military needs indefinitely.”[6]
Recent publications also points to changes in the nature of international shipping itself as potential complicating factors: in a prospective blockade scenario, few – if any – civilian vessels would fly the Chinese flag and, given the practice of selling and reselling cargo on spot markets, a ship´s final destination might not be known until it actually enters port.[7] But while Mirski’s proposal of instituting a system of digital navigational certification is ingenious, he dodges the broader question of how the United States and the nations of the Asia-Pacific would deal with the myriad repercussions of what would amount to a major disruption of the globalized economic sphere for an extended period of time.
Conclusion: Return of the commerce raiders?
If nothing else, the current debate about a U.S. naval blockade of China reveals that – much like their predecessors in past centuries – strategists in a globalized era see shipping as a repository of strategic vulnerability, particularly in cases of high-intensity conflict between great or medium-size powers. But while the potential leverage to be gained from nations’ dependence on international shipping is perhaps greater than ever before, the actual leverage might not correspond to planners’ expectations. The sources of this disconnect lie primarily in the political and economic context in which any concerted military action against sea-borne trade would be embedded. Given the U.S. Navy’s determined stewardship of freedom of navigation, the U.S. in particular would find itself on the wrong side of the norms it has been upholding for the past 60 years. And while the economic fall-out of any great power war is likely to be significant, the willful disruption of trade flows for strategic effect would only serve to accentuate the costs to regional allies and global trading partners.
As a result, unrestricted commerce warfare of the type pursued by the U.S. Navy against Japan in 1941-45 is just not in the cards. On the other hand, anything short of a strategically counterproductive ‘sink-on-sight’ policy might not produce sufficient strategic impact to justify the cost of embarking on such a risky course of action in the first place. Finally, once we move beyond the context of open interstate warfare, multilateral economic sanctions offer the possibility of causing many of the same effects at markedly lower cost to the attacker’s international standing.
Overall, the recent surge of interest in economic warfare strategies does little to encourage faith in the potential decisiveness of military actions against globalized trade, and serves to underline the practical and political challenges presented by any attempt at leveraging the vulnerabilities of a major trading power under 21st-century conditions. While the dependence on international shipping poses many risks, the strategic leverage it provides as a direct result of its crucial contribution to the prosperity of nations is now more apparent than real.
Michael Haas is a researcher with the Global Security Team at the Center for Security Studies, ETH Zurich. The views presented above are his alone. Michael tweets @the_final_stand.
[1] Thomas L. Friedman (2006), The World Is Flat: The Globalised World in the Twenty-first Century (London: Penguin), 468.
[2] Colin S. Gray (1992), The Leverage of Sea Power: The Strategic Advantage of Navies in War (New York: Free Press), 13.
[3] Robert A. Pape (1996), Bombing to Win: Air Power and Coercion in War (Ithaca, NY: Cornell UP), 100-01.
[5] Sean Mirski (2013), “Stranglehold: The Context, Conduct and Consequences of an American Naval Blockade of China,” Journal of Strategic Studies 36:3, 389.
In his talk at the U.S. Naval Warfare Development Command last Friday, CDR Bryan McGrath (ret.) made some important assertions about the affordability of our Navy in the context of the Federal Budget. At about the five minute point, he describes what he envisions as the ideal Navy to meet the United States’ security needs and proposes that it would cost about $25 Billion more than what we currently spend. He then goes on to place $25 Billion in context:
$25 Billion Dollars is:
4.6% of the base Defense budget
1.9% of the National budget
0.16% of projected GDP
“…so don’t tell me we can’t afford a bigger Navy,” commands McGrath. “We can afford it. We choose not to have a bigger Navy.”
If we’re going to talk about government spending, it is important to make sure we’re all reading from the same sheet of music. DoD advocates like CDR McGrath assert that the portion of national treasure we’re willing to invest in Defense is approaching record lows. Defense spending critics suggest that even in spite of cuts, we are throwing more money at DoD than at almost any point in history, to include the heights of the Cold War arms races. They are all correct; whether we are at a low point or a high point in defense spending is entirely subject to the frame of reference. Which reference we choose will invariably be determined by our motives.
Discussions of Defense spending are generally framed in one of three ways:
1. Defense Spending as a Function of Dollars Spent
It’s hard to argue with cold hard cash. The money we spend on Defense has grown at an accelerating rate over the last century:
However convincing this graph is at first glance, you’ll find that only the most hyperbolic of critics of Defense spending will rest their argument on it. It is based on nominal or “actual” dollars spent, which do not account for the erosion of purchasing power that is inflation. We can correct for inflation by selecting a “base year” and then adjusting the dollar amounts at every other point to the purchasing power of an equivalent sum of money in the base year. Using 2014 as the base year, our corrected graph of defense spending looks more like this:
The blue line indicates what Defense spending would have been if the purchasing power of a dollar had always been equal to its 2014 value. While spending has oscillated pretty widely, the overall trend is positive: the price, presumably, of steady growth in things like technological complexity, personnel benefits, veteran health care, and administrative overhead. One major source of contention when framing arguments around inflation-adjusted dollars is exactly which rate of inflation is correct. Economists do not all agree, and DoD claims yet another rate of inflation from the economy at large due to a variety of factors.
2. Defense Spending as a Function of Resource Allocation
We’ve all seen a graph like this:
We can’t even balance the budget, and we’re spending over half of it on the military!? Preposterous!
Are we really, though? Pay attention to the title: this graph shows “Discretionary Spending,” which is that portion of the federal budget that is determined by Congress through an appropriations bill. This is opposed to “Mandatory Spending,” which is the outlay of government funds required by law. If we include Mandatory Spending, allocation of federal spending will look more like this:
Mandatory Spending is effectively made up of entitlement programs. It is important to point out that in the fiscal sense, “entitlement” is not the sense of privilege attributed to Millennials by the previous generations. Entitlement is a technical term which describes expenditures which are not limited by any budget, but instead are a function of the number of people who qualify for them and the expenses incurred by the services promised. Because they don’t need to be re-approved every year, unlike discretionary spending, most entitlement expenditures will grow uncontrollably without a change in the law.
3. Defense Spending as a Function of Economic Output
Described in terms of Gross Domestic Product, or the total economic output of the United States, Defense spending looks something like this:
The graph illustrates a downward trend in economic capacity committed to the military. Most DoD budget people will describe Defense spending in terms of GDP, ostensibly because it most accurately conveys economic burden. Bryan McGrath described his ideal Navy in terms of dollars, and then convincingly justified his position in terms of GDP.
Critics argue that using GDP as a yardstick merely serves the purposes of those who would seek more money by obfuscating actual dollar costs. Making sense of what is spent is made even more difficult by fluctuations in the denominator: GDP can vary wildly from year to year, which would appear on this graph as drastic changes to Defense spending. Yet another argument against measuring spending by GDP is that GDP is an estimate at best, and there is much disagreement between economists as to how it should be measured.
Bringing it All Together
If we lay out the various methods of describing Defense spending on the same graph, we get something like this:
As you can see, Defense spending can look completely different depending on how it is framed. It can be described as a dollar cost, a portion of federal spending, or a portion of economic output. Each perspective illustrates important information that the others fail to address, and each one can be abused to promote an agenda.
LT Will Spears, USN, is an Active duty submariner; post-JO shore duty type. His last tour was aboard a WESTPAC Fast-Attack; he is now at NPS focusing on family and personal development. He is the author of the leadership blog JO Rules.
Note: The views expressed above are solely those of the author and do not necessarily represent those of the U.S. Navy, the Department of Defense, or the Center for International Maritime Security.
Greetings, and happy post-Independence Day to the CIMSEC crowd. I’m a new member here, having recently left Active Duty for the Navy Reserve and gone to work in the DC area. My active time consisted of a hull swap on two old ships and becoming a plankowner on a new ship, plus training recruits on shore duty. But nowadays I’ve returned to my journalism-major roots as a civilian, and my initial goal for CIMSEC was just to apply those skills with some editing and other behind-the-scenes support for NextWar. Of course, news broke during the holiday period that, naturally, drew attention.
Just before the Fourth of July, the heavy-lift ship Eide Transporter floated off three pieces of valuable cargo in Bahrain – the USS Tempest, Squall and Thunderbolt. The trio joins five PCs already stationed in Bahrain, with two more to come next year.
From the Navy Times: “They’re perfectly suited for what we do,” Capt. Joseph Naman, commander of Bahrain-based Destroyer Squadron 50 serving the 5th Fleet, said during the conference call. “There’s a lot of shallow water out here.”
This demand signal from U.S. Fifth Fleet (and, presumably, Central Command) could be considered a reflection of the actual operational needs of the Navy. Apparently those needs include a large number of shallow-draft yet heavily-armed vessels that match up well with the fleets of local allies. Add upgrades with gyro-stabilized Mark 38s and a Griffin missile system, and you’ve got a capable platform for visual-range engagements against other small combatants. Cost estimates are hard to find, but this onelists the PC class as $31 million apiece. Be generous and add 50 percent, so maybe now we’re talking $45 million.
A question then presents itself. In this time of supposed austerity and fiscal sobriety – in which our Navy is also looking to grow the Fleet – why can’t we build more of these, or something similar? Especially if they fit the mission so well that CENTCOM can’t get enough of them?
For the near term, part of the answer seems to be we’re already building a “small and nimble” craft. Except it brings a draft in excess of 12 feet and not much more weaponry than a PC – and all that for at least ten times the cost. The LCS flight deck is great, but I’m not convinced it’s worth the extra hundreds of millions of dollars. At least, not 55 of them.
Yes, unit costs will come down with further builds. Yes, each version brings a huge flight deck. But cut the cost in half and you can still put five or six PC-equivalents in the water at the same price, reach out and touch more Gulf partners (or allies in any littoral environment), and not incur such huge losses as will occur when the expensive LCS ends up overmatched in a contested environment. The LCS certainly will find some uses out in the Fleet – but when the very mission for which it was designed is already being performed by ships built for a tenth of the cost, can we really justify building more of one and not the other? And building that “other” must happen soon. All but one PC are in excess of their intended service life, and their age is starting to show.
Much credit in this discussion goes to many fine recent articles floating about the blogosphere concerning future Fleet composition. To paraphrase one such Proceedings article which I am not the first to reference, the Navy could do worse than to build some Fords instead of Ferraris.
Matt served as a division officer aboard USS Shiloh (CG-67), USS Chancellorsville (CG-62) and USS Makin Island (LHD-8), and at Recruit Training Command ashore. He is a strategic communications consultant in the Washington, DC, area and is a Navy Reservist.
