Chinese Defense Spending Should be PPP Adjusted

The Chinese type 052 destroyer Qingdao receives a warm welcome at Pearl Harbor.

Nearly everyone has seen some infographic showing US military spending compared to the rest of the world. At market rates, American military spending was roughly equivalent to the next seven countries combined during 2018 (note that defense spending estimates are always approximate and vary based on methodology). To be sure, there is nothing factually incorrect about this common refrain — the US does, at market rates, spend far more on defense than any other country. However, nominal (market-rate USD) defense spending figures can be misleading.

This is especially true when assessing relative capability. Numerous times, I have been asked something like: “Why do we need to spend so much on defense when our military is far more powerful than everyone else’s? After all, we pay seven times as much as the next seven highest spenders combined.”

The problem: a dollar simply buys more in some countries than in others, and nominal defense spending figures do not account for this.

The problem is most acute vis a vis China, the second-place spender and the country which most concerns American defense officials. At nominal rates, Chinese defense spending is about 1/3 that of America. Based on this, one would not expect the Chinese military to pose a threat to the US. However, as most China watchers would tell you, the PRC’s forces are far more capable than the nominal figure would suggest. This is because nominal spending does not take into account lower prices for labor, raw materials, healthcare, etc. in China. I am not the first one to make this point; Breaking Defense author extraordinaire Syndey Freeberg wrote a 2018 article on the same topic after Army Chief of Staff Mark Milley invoked cost of labor disparities during a Senate hearing.

Applying a typical PPP adjustment, the type normally used with GDP figures, yields a Chinese defense spending figure of ~$430 billion, about 2/3 of US levels rather than 1/3. However, GDP PPP conversion rates are not fully appropriate for defense spending adjustments, as defense spending is not representative of the economy as a whole — militaries buy a disproportionate quantity of advanced heavy industrial products and liquid hydrocarbons, for example. As such, I hypothesize that Chinese defense expenditure, properly PPP adjusted, would land somewhere between the ~230 billion nominal figure and the ~430 billion GDP PPP-adjusted figure.

Obtaining a proper PPP-adjusted figure for Chinese military expenditure is far beyond the scope of this article — the task would require detailed scrutiny of the limited publicly available information and a great deal of economic expertise. A think tank such as RAND or Brookings would be better suited to the task. However, I firmly believe that someone or some entity should tackle the challenge; a proper PPP-adjusted figure for Chinese defense spending would greatly increase the quality of discourse surrounding American defense expenditure levels and help policymakers understand the magnitude of the PLA challenge.

Many of these points apply to Russia as well, although perhaps to a lesser extent; in addition to a PPP advantage, Russia greatly benefits from investments made during the Cold War and high export sales.

In addition to PPP disparities, numerous other factors play into the balance of military power, with geography and distance being perhaps the most important. China poses a severe threat to American power in Asia because their entire military is based close to likely conflict areas and could easily sortie from the mainland. In contrast, only a small portion of the US military is stationed in Asia at any given time, and the rest would have to be flown or shipped in after the onset of hostilities. So, the balance of power in the opening stages of a conflict would be far more precarious than military-wide figures would suggest.

These complexities underscore the need to define military objectives in concrete terms, rather than with opaque metrics like the overall spending level. Policymakers should be realistic about what exactly they expect the military to do in a conflict and what resources are necessary to provide the requisite capability. Likewise, we should endeavor to use adversary capabilities as our lens of analysis and not be misled by spending level disparities. China’s recent advances in military technology are remarkable, especially in the naval realm; the PLA is commissioning advanced surface warships at rates faster than the US despite its far smaller nominal budget. These serious challenges demand informed engagement using better figures than the nominal spending levels so often cited.

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