Keeping The Sea Lanes Open

Is securing the sea lanes a valid rationale for Defence spending?
by John Quiggin

Editor’s note : Professor John Quiggin is a Queensland University economist, author and commentator. He’s like an Australian version of Paul Krugman, much as he’d probably dislike the label. John has kindly allowed Werewolf to reprint his columns on Australian politics and economic issues. So… to kick off a Werewolf issue that focuses on Defence spending, here’s a recent Quiggin column about whether trading nations (like Australia and New Zealand) have an overriding interest in keeping the sea lanes open – whatever the cost in Defence spending, and regardless of the evidence that navies are now virtually obsolete, in a war-fighting sense.

Whenever I raise the observation that navies are essentially obsolete, someone is bound to raise the cry :“What about the sea lanes”. The claim that navies play a vital role in protecting trade routes is taken so much for granted that it might seem untestable. But it turns out that most of the information needed for a benefit cost analysis is available. Unsurprisingly (to me at least), the claimed benefit of keeping sea lanes open doesn’t stand up to scrutiny. I’ve spelt this out in mylatest article in Inside Story, reprinted over the fold.

Among the beliefs that drive military policy in the developed world, the importance of keeping sea lanes open is prominent. Australia’s White Paper on Defence, released to a generally favorable reaction, took this requirement as self-evident, and justifying the expenditure of at least $150 billion on submarines. The subsequent controversy turned on the second-order question of whether this requirement was so vital as to require a rushed replacement of our existing fleet, or whether the task should be undertaken more slowly and carefully.

Australia is not unusual in its concern for trade routes. For example, a recent Politico article on European attitudes to the possible election of Donald Trump as US President concluded with the fear that ‘They might also be on the hook for indirect benefits of U.S. military spending, like the protection of commercial sea routes’

This concern is partly based on historical memory of the important role of attacks on commercial shipping in previous wars, most notably World War II. However, the primary focus of concern is not a ‘total war’ on merchant shipping, as in the Battle of the Atlantic (in a world of nuclear weapons, it is unlikely that such a war could last long enough to have any real effect) but on the possibility of struggle for control over particular routes of strategic importance. The most popular candidate at present is the South China Sea, where China has long advanced territorial claims rejected by its neighbours and by the United States.

Given the possibility that increased expenditure might be demanded to protect commercial sea routes, it is worthwhile to ask what the costs and benefits of such expenditure might be. The costs may be measured straightforwardly enough in terms of defence budgets, and particularly of the requirement for increased naval expenditure. But how can we determine whether such expenditure is justified?

It turns out, surprisingly enough, that we can estimate the benefits of open commercial shipping lanes (or, equivalently, the costs of losing access to such lanes) at least to within an order of magnitude. Moreover, we do have some experience to help assess how useful naval power might be in protecting sea routes. In both cases, the source of our evidence is the Suez Canal, and the crises that led to its closure in 1956, and again in 1967.

The 1956 crisis is important because it represents the only significant attempt, since 1945, to use military force to forestall a perceived threat to commercial shipping lanes, and because it ended in complete failure. The crisis began with the decision by the Egyptian government, under the effective dictatorship of Gamal Abdel Nasser to nationalize the Suez Canal, previously under British and French ownership. This decision, following conflicts over a variety of other issues, led the British and French governments ( in secret collusion with Israel ) to plan a military operation to regain control of the canal. Although the Egyptians were defeated militarily, they sank all the ships in the Canal at the time, thereby blocking it. A hostile international reaction, most notably from the Eisenhower Administration in the United States, led to a humiliating withdrawal by the Anglo-French forces. The Canal was cleared and reopened after four months.

The 1967 crisis, which began with the Six Days War, led to the closure of the Canal for six years. This lengthy period provides empirical evidence on the impact of such a closure, evidence that has been neatly analysed by James Feyrer, who summarized his findings in this VoxEU article

Feyrer begins by working out the average increase in shipping distances between countries associated with the Canal closure. For any given country, these increases can be weighted by trade flows to give an average effect. For a few countries such as India and Pakistan, the trade-weighted increased shipping distance was large (about 30 per cent) and so, it turns out, was the impact on trade and economic activity. Mostly, however, the effect was smaller. For example, the increase for Britain was 3.3 per cent and for France 1.5 per cent. Feyrer estimates that, in the long run, a given proportional increase in shipping distances say 10 per cent, produces a reduction in trade of about half that proportion (in this case 5 per cent). Further, he estimates, a reduction in trade produces a reduction in national income or GDP that is about 25 per cent as large.

To produce an estimate of the total impact, we need one more number: the ratio of seaborne trade to national income. This is hard to measure precisely, but a figure of around 15 per cent looks reasonable. With this in mind, we can run the numbers for Britain and the Suez Canal closure. A 3.3 per cent increase in shipping distances should produce a 1.6 per cent reduction in trade, which is equivalent to 0.24 per cent (0.016*0.15) of GDP. The loss in GDP is 25 per cent of this, or around 0.06 per cent of GDP. The corresponding number for France would be about 0.03 per cent.

Is this a lot or a little? An obvious basis of comparison is Defence expenditure, which [in Australia] is typically around 2 per cent of GDP, and is commonly thought of as being equally divided between armies, navies and air forces. On that basis, naval expenditure amounts to about 0.6 per cent of GDP.

To compare these two numbers, we need one more piece of information, which is more speculative than those discussed this far. How much difference do navies make to the openness or otherwise of commercial sea routes? On the historical evidence, it might seem, not very much. The one major intervention in the post-1945 record, Suez in 1956, produced exactly the outcome it was supposed to preclude.

But, the advocates of military expenditure can always argue, it’s only because of powerful navies like that of the US that we don’t see lots of attempts at closing sea lanes. This argument… does not admit a definite refutation. Still, given the relative magnitudes, the counterfactual in the absence of naval expenditure would have to be a chronic state of crisis ten times as bad as the blocking of the Suez Canal.

Would a crisis in the South China Sea, presumably caused by a Chinese attempt to claim control, have such a huge adverse effect? It is routinely pointed out that the volume of trade passing through the South China Sea ($5.3 trillion on this estimate ) is very large. But the great majority of this trade (around $4 trillion) is going to or from China. (See footnote.)

Obviously, the Chinese government can control this trade in any way it chooses through domestic policies, and has no interest in blocking it. The remaining $1 trillion or so of trade (about 1.5 per cent of global GDP) might, in the event of a crisis, be forced to take more circuitous routes, as happened when the Suez Canal was blocked. But using the same method as was applied to Suez, it’s easy to see that the total impact would be modest.

On past experience, it seems highly unlikely that an economic analysis of this kind will have any effect on military policy discussions. Vague claims about economic interests loom large in such discussions, and attempts to pin them down to concrete realities. The century beginning with World War I, and running through to the trillion-dollar quagmires in Iraq and Afghanistan has seen countless demonstrations that, under modern conditions, war is almost invariably an economic disaster for all concerned. That hasn’t stopped war, and preparation for war, being considered as an essential part of a national economic strategy, and it seems unlikely to do so.

Footnote : Someone who took the “sea lanes” argument seriously might conclude that China has a legitimate interest in excluding potentially hostile forces from such a vital area. But that kind of consistency would violate the sacred doctrine of “freedom of navigation”. Catch-22 is alive and well.

Defence Footnote Two

France has just beaten out its German and Japanese rivals for the design contract for the 12 new submarines that the Australian Defence White Paper says will replace its current Collins-class submarine fleet. Prime Minister Malcolm Turnbull has once again emphasized that Defence spending is treated by Australia as a major job creation/r &d opportunity.

The submarines will cost $20bn to build and $30bn to sustain after they come into operation in the middle of the next decade. Turnbull said the submarine contract would “secure Australia, secure our island nation, but [also] ensure that our economy transitions to the economy of the 21st century”. The submarine project alone would create 2,800 jobs, he said.

Turnbull said the submarines “will be built here in Australia … with Australian jobs, Australian steel, and Australian expertise”. However, some components may come from other states of Australia or other countries including the combat system, which will be sourced from the US.

Needless to say, our own soon to-be-announced Defence spending spree will offer little or nothing in the way of comparable benefits for New Zealand. If anything, New Zealanders will watch their taxes being spent on creating jobs in the Australian shipbuilding industry.

1 Comment on Keeping The Sea Lanes Open

  1. A lot of things have changed, but not the inability of modern states to function effectively without sea trade. It was really the Royal Navy(ies), which sealed the fates of our enemies over the last several centuries. Piracy was also beaten, then let grow, now on the run again. Thanks to our navies. Nuke-ing means all lose, no winners. And the enemies of freedom are not scrapping navies.
    That said, I see we can now build superb rockets, cheaply….No one can walk here.

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