Reading the mass media, it looks as if the US and China are on a collision course. The Google episode and the sale of US weapons to Taiwan convey the impression of two superpowers staring each other down. The two powers may, however, soon be forced into each other’s arms by the dismal outlook for US public finance and potential social unrest in China.
History offers a number of examples where a superpower sees its strategic options limited by financial constraints. Unless strategy is brought into line with financial strength, a superpower’s posture will not be taken seriously and decline accelerates. This happened to the British Empire in the beginning of the 20th century. The US is fast moving towards such a policy dilemma. Equally, the door is opening for rising powers to move into the vacuum and gradually assume leadership.
This time, however, something else might happen because the option of an understanding between China and the US to cap military spending could be on the cards. The idea sounds far fetched and wholly unrealistic, but the figures tell another story.
Measured as share of Gross Domestic Product (GDP) both countries are running military expenditures a little bit above 4 per cent, but total outlays are definitely higher as some programs are ‘hidden’ under quasi-civilian items. Military expenditures of this size can probably be sustained if national security warrants it, but remain highly unwelcome.
The US is facing a deficit on the federal budget for the foreseeable future. Essential domestic policies imply steeply rising expenditure. Over the next decade, according to the Congressional Budget Office (CBO) Medicaid and Medicare on the federal budget will rise every year up to 6 or 7 per cent and social security maybe half that amount – currently these three items account for no less than 40 per cent of total expenditure. A forecast for the public debt reveals a significant increase bringing it above total Gross Domestic Product (GDP) from the current figure of approximately 70 per cent. Net interest payments accounted for 8 per cent (USD 234 bn) of the federal budget in 2009. A prudent estimate points to 20 per cent - a sum of more than USD 700 bn - in 2019.
To prevent this from happening, taxes must be raised or expenditure cut. Higher taxes to raise revenue can probably be ruled out, especially in an election year. That leaves the expenditure side to stop net interest payments rising from USD 234bn to 700 bn – i.e. asking for cuts of USD 466bn. The snag is, however, that 60 per cent of the federal budget is mandatory, so expenditure flows from existing laws cannot be cut unless new laws are passed, almost impossible to do and if tried, will be a time consuming process. Consequently discretionary spending must be cut, but this part of the federal budget accounts for only USD 1.333 bn of which almost half goes to the military. To squeeze USD 466 bn out of 1.333 bn is in itself a daunting task, but to do it if cuts in military spending are ruled out, makes it an impossible task. The conclusion seems inescapable that sooner or later, and probably sooner rather than later the size of the military budget (accounting for half of all discretionary spending) will be questioned. The money simply cannot be found elsewhere. Indeed, House Speaker Nancy Pelosi, has already stated that Obama's proposed freeze on selected discretionary spending should also apply to military spending, which was exempted.
Over a time span of several decades China may have the financial muscle to build a military comparable with what the US has, with economic growth locked into a pattern of 10 per cent or thereabouts and generally healthy public finances. China, however, faces structural problems in its economy.
The need for diverting an increasing share of growth towards social expenditure looms large every day. China’s future pension burden plus its endeavors to develop the Western parts of the county top its list of priorities. Inequality has passed the danger threshold defined by the OECD, with China’s Gini-coefficient at 0.47, above the 0.40 limit. If it is allowed to continue upwards, it moves into an alarm bracket, threatening the social and political stability that legitimises the monopoly of power arrogated to the Chinese Communist Party. Question marks over the purpose of large military spending may nullify the existing image of China as a nation not seeking influence through military power – an impression carefully created by China’s leadership over many years. In short, a military build up can be achieved, but with a political price – domestically and abroad - that may outweigh potential benefits.
Modern strategic thought right sizes conventional military threats with a greater focus on threats related to social stability, political instability, and human security. A nation’s ability to ‘defend’ itself depends upon its social cohesion; diverting funds allocated to serve this objective endangers its stability and the political system’s legitimacy, consequently undermining its security.
The break down of the American style of capitalism over the last couple of years may have cost the US much more in global leadership than a military posture can compensate for. Not only has the model lost its lure, but the financial resources to further American influence are simply not available anymore. US investments abroad and/or financial assistance are much more effective than carrier groups in spreading and securing influence. China is actually doing exactly this through a buying spree, especially in Africa accompanied by a policy message that it is ‘different’ in the sense that it does not want to interfere in domestic matters, and leaves it to the host country to run its own affairs.
Logically, such considerations might lead the two countries to limit or even reduce military expenditure. As of now, the US is the only military super power and China is the only challenger in the medium or long-term. They can act as the US and the Soviet Union did during the cold war knowing that few if any other nations threaten them militarily.
An initiative to limit followed by a reduction of military expenditure between the US and China would be a break through especially if traced by other powers. It will also save the American economy sailing into uncharted waters from the risk of capsizing under the burden of rising debt.
Mutual suspicion remains the main barrier for such an agreement. The US fears that China hides military expenditure under other headings in its budget. China might think the US is preventing its rise. Hard reality may break down such barriers. If not, the US may inadvertently be drawn into the same trap it set for the Soviet Union in the 1980s: arms expenditure as a drag anchor steering the Soviet economy towards the rocks. China will have little benefit of a lame US making the global scene even more complicated and dangerous than it is now.