Growing concerns about narrowing gap between US-China military spending

While the US Congress recently indulged in games of political and economic brinkmanship over the state of the nation’s debt ceiling, juggling the economic stability and prosperity of much of the global economy in its hands, across the Pacific, the world’s rising economic, political, and strategic power has been quietly working away to continue its immense strategic build up.

Equally impactful is the long-term debate and negotiations between the major political parties, special interests ,and the defence industrial base across the United States that ensure capabilities ranging from the F-35 Joint Strike Fighter through to small arms munitions or the M1 Abrams and the myriad of other platforms in development or under construction are funded and delivered, often creating desperate rounds of funding infighting.

In contrast, Beijing is well on the way to becoming one of the world’s pre-eminent military powers with the power rapidly developing its multi-spectrum military capabilities with the Strategic Rocket Forces, People’s Liberation Army, Navy and Air Force respectably all undergoing a suite of modernisation programs seeing them being transformed into a truly top tier global fighting force.

Using the growth in the Chinese Navy as an example, a report to the US Congressional Research Service (CRS) highlights, “China’s navy is, by far, the largest of any country in East Asia, and sometime between 2015 and 2020 it surpassed the US Navy in numbers of battle force ships (meaning the types of ships that count towards the quoted size of the US Navy).

“China’s naval modernisation effort encompasses a wide array of platform and weapon acquisition programs, including anti-ship ballistic missiles (ASBMs), anti-ship cruise missiles (ASCMs), submarines, surface ships, aircraft, unmanned vehicles (UVs), and supporting C4ISR (command and control, communications, computers, intelligence, surveillance, and reconnaissance) systems. China’s naval modernisation effort also includes improvements in logistics, doctrine, personnel quality, education and training, and exercises,” the CRS report highlights.

Contextualising this against the broader global geopolitical and strategic environment, Senator Dan Sullivan recently articulated the budgetary challenges facing the United States Armed Forces when compared to the People’s Republic of China and its People’s Liberation Army, stating, “Authoritarian dictators, with an immense appetite for conquest, are on the march, and yet what does this budget agreement do? It cuts defense spending significantly, as already mentioned. Now, some people will say: Well, look at the top line. We never had a higher top line — $800-plus billion. As the presiding officer knows, the actual real measure of how serious we are as a country isn’t the top line. Because of inflation over the years it is hard to compare.

“This budget will take us, in the next two years, with the cut this year, an inflation-adjusted cut of 4 to 5 per cent, and a nominal increase next year of 1 per cent, which would be about a 5- to 6- per cent cut — it will take us below the 3 percent of GDP number for defence for the first time since 1999, during the peace dividend era of the Clinton administration. So we will be below 3 per cent of GDP,” Senator Sullivan explained.

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Long held truths don’t always hold true

There is a common and long held understanding that the United States is the undisputed leader of global defence spending, and on face value, for the 2022 fiscal year, the United States represents some 39 per cent (US$877 billion) of all global defence expenditure according to the Stockholm International Peace Research Institute (SIPRI), while China represents 13 per cent (US$292 billion), respectively.

Historically, according to the Peter G. Peterson Foundation, the United States has typically spent a significantly larger portion of its gross domestic product (GDP) on defence, with US defence spending maxing out at 7 per cent of GDP in the 1980s during the height of the Reagan administration, dipping to approximately 3 per cent of GDP in the late-1990s and early-2000s.

This is reinforced by figures quoted by Mackenzie Eaglen, senior Fellow at the American Enterprise Institute, who states, “American defence spending has not been growing proportionally with the nation’s wealth nor other federal spending. Our military budget continues to shrink as a percentage of national GDP, with the spending levels for defence projected in fiscal year 2025 likely taking the budget under 3 per cent of GDP for the first time since the days of the peace dividend.”

Conversely, the figures quoted for the Chinese defence expenditure remain only what is publicly reported by the Chinese Communist Party raising questions about the accuracy and legitimacy of the figures represented. This only becomes more apparent, when explained by Senator Sullivan quoting a top US intelligence official, states, “It was a classified briefing, and I asked him if this number was classified. They told me no. They came out and said the real Chinese budget, in terms of the military, is probably close to about US$700 billion. That is a big budget.”

Explaining the growth in the Chinese defence budget, Eaglen adds, “Meanwhile, the Chinese Communist Party is wasting no time in consistently increasing military spending. At the opening of the 14th National People’s Congress this past March, Beijing announced a defence budget of $227.79 billion (1.55 trillion yuan), a 7.7 per cent increase from the previous year following a decade of similar substantial hikes.”

If the figure presented by Senator Sullivan is to be believed, this truly staggering figure brings the Chinese defence budget closer to 4 per cent of the People’s Republic of China’s current GDP.

Importantly however, the mathematics isn’t a simple matter of converting US dollars to yuan or vice versa, rather this is where the purchasing power parity (PPP) becomes more important, something highlighted by Eaglen who explains, “Simply converting spending in Chinese yuan to US dollars based on a currency exchange rate overstates American capacity if China pays significantly less for most things. Vacationers know as good as anyone that a dollar spent in one place can go a lot further in others. For this reason, economies are often measured on purchasing power parity (PPP) in order to conduct relevant comparisons — and this is why China has the world’s largest economy when using accounting for PPP. The principle holds when paying soldiers or purchasing military hardware.”

Overconfidence in spending could be our undoing

This is explained in further detail by Peter Robertson of the Centre for Economic Policy Research who explains the true power of PPP spending in the modern context, particularly when comparing the United States with China, India, and Russia, the three major great powers vying for dominance in the 21st century, stating, “Looking at military spending this way reveals that real military spending in many countries is indeed far larger than the values implied by market exchange rates. To see this, rather than looking at the US relative to the next eight countries, we can focus on just three other countries — China, India, and Russia.

“In market exchange rate terms, these three countries have combined military spending in 2019 that amounts to US$378 billion, compared to the US’s $734 billion. In military-PPP terms, however, their combined spending is US$840 billion. Hence, in real terms, the US military budget in 2019 is not larger than the next 11 countries. Rather it is smaller than the next three and similar to the spending of China and Russia combined,” Robertson explains.

This startling reality presents serious concerns for both the United States and its allies, particularly those in the Indo-Pacific like Australia. In contrast to seemingly endless Chinese spending growth, both the US and its allies, including Australia, are facing stagnating or declining defence budgets (in real terms) as a result of increasingly costly technology-heavy platforms, coupled with continuing societal atomisation and disconnection from the principles of liberal democracy, placing increasing strain on their capacity to counter growing Chinese multi-domain capabilities.

Final thoughts

For Australia, it is increasingly important for us to recognise the relative decline of the United States (not a popular opinion to state out loud) when compared to the rising powers of China, India, and other regional powers, equally, it is important for us to accept and understand that the United States has limitations, only then can Australia truly begin to take stock of the challenges of operating in this increasingly multipolar world.

It is equally critical for us to understand that Australia’s security, prosperity, and stability will not be determined by events in Europe, nor will they be determined by circumstances in the Middle East, while they may influence circumstance, our national future will not be determined by these areas. Highlighting this point, Peter Jennings AO, speaking at the Defence Connect DSR Summit, explained, “It [the Defence Strategic Review] misreads the source of the risk, the source of the risk is China.”

Explaining further, Jennings said, “It misreads that we are just watching this (on the sidelines), but we are actually heavily invested in this [US-China] competition. I think that language is giving the government an opportunity not to talk about China ... These three paragraphs would have to have been the three most talked about in the review. I am pleased that the document has said what we all know to be true, but there is plenty of transparency about what China is doing. (It can be found) In Xi Jinping’s speeches and writing, government documents; strategy running counter to the current global order.

“Australians aren’t silly and are, to a certain extent, ahead of our politicians at the moment,” Jennings explained to the audience.

Achieving this will also require the nation to establish a “strategic intent” for itself, to do so, we will need to ask ourselves what sort of nation do we wish to be, what do we want to be capable of, and what is the objective reality of our nation we want others to see us as?

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