M. Taylor Fravel, George Gilboy, and Eric Heginbotham | War on the Rocks
"American political and military leaders are amplifying flawed estimates that China’s annual defense spending is much higher than it actually is. In these mistaken calculations, China’s defense spending has reached $700 billion, approaching the level of the U.S. defense budget. These exaggerated estimates have gained traction in Congress, the media, and defense circles.
However, as we show in our recent article in the Texas National Security Review (and as we also discussed on Horns of a Dilemma) these exaggerated estimates count spending categories for China without counting similar spending for the United States and apply purchasing power parity methods emphasizing low labor costs as a key military advantage. PPP exchange rate estimates address a problem familiar to many international travelers: a dollar spent in a poorer country will buy more of a domestic product like clothing, food, or housing than a dollar spent in a richer country. Higher overall price levels in richer countries are due to higher levels of technology investment, productivity, and wages. Purchasing power parity adjusts for different price levels to allow cost comparison for similar products.
Accounting for spending not included in official budgets and using new World Bank purchasing power parity data published in 2024, we estimate that China will spend the equivalent of $474 billion on defense in 2024, much more than its official 2024 defense budget of $232 billion at market exchange rates. When compared to similar U.S. spending categories, this represents 36 percent of 2024 U.S. defense-related spending of $1.3 trillion.
Our approach is based on two simple but frequently ignored principles. First, any comparison to U.S. defense spending should contain similar spending categories for China and for the United States. Second, the exchange rate employed for converting currencies should be appropriate to the military budget. If purchasing power parity adjustments are made for specific budget elements such as military wages, then they should, where possible, be based on actual cost data (not estimates). Where this is more difficult, appropriate sector-level purchasing power parity data should be applied to inputs such as personnel, operations and training, and equipment costs.
Why do such estimates matter, and why is it important to make them as accurately as possible? First, there is no excuse for getting an important national security–related estimate wrong when better data and methods are available. Second, defense spending estimates play a critical role in assessing the degree and nature of military challenges that China poses to the United States and its allies. All else equal, a larger defense budget suggests a more salient threat. Underestimating the threat can leave one unprepared, while overestimating it can fuel spirals of security competition. Third, a misplaced focus on aggregate spending levels can distract attention from the more important debate about what kinds of capabilities the United States should purchase in response to China’s ongoing military modernization.