Inside Story

Keeping the sea lanes open: a cost–benefit analysis

Defence and economics mix in ways that aren’t considered by military strategists, writes John Quiggin

John Quiggin 17 March 2016 1262 words

Costly benefits: US Navy personnel raise their national flag during a bilateral exercise with the Philippine Navy, as the dispute over the strategic waterways of the South China Sea intensified in June 2014. Noel Celis/Pool Photo via AP

One of the convictions that drives military policy in the developed world is a shared belief in the importance of keeping sea lanes open. For the authors of Australia’s white paper on defence, released to a generally favourable reaction earlier this month, freedom of the seas self-evidently justifies the expenditure of $150 billion or more on new submarines. The only real controversy arises from the second-order question of whether the task requires a rushed replacement of our existing fleet or a slower and more careful response.

Australia is not unusual in its concern for trade routes. Reporting recently on European attitudes to the possible election of Donald Trump as US president, Politico concluded with a warning that “cash-strapped EU governments” might be “on the hook for indirect benefits of US military spending, like the protection of commercial sea routes.”

This concern is based partly on memories of the role played by attacks on commercial shipping in previous wars, most notably during the second world war. But no one is expecting a “total war” attack on merchant shipping, as in the Battle of the Atlantic; in a world of nuclear weapons, such a war is unlikely to last long enough. What worries policy-makers is the possibility of struggle for control of strategically important routes. And the most popular candidate at the moment 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 protecting commercial sea routes could involve significant spending, it is worth asking exactly what the costs and benefits might be. The costs can be measured straightforwardly enough using defence budget statements, but how can we determine the benefits?

Surprisingly enough, it turns out 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 two real-world examples to help us assess how useful naval power might be in protecting sea routes. Both cases involve crises that led to the closure of the Suez Canal, in 1956 and again in 1967.

The 1956 crisis is important not only because it represents the only significant attempt, since 1945, to use military force to forestall a perceived threat to commercial shipping lanes, but also 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 nationalise the Suez Canal, previously under British and French ownership. Coming after conflicts over a variety of other issues, Nasser’s plan prompted the British and French governments, in secret collusion with Israel, to launch a military operation to regain control of the canal.

Although the Egyptians were defeated militarily, their forces sank all the ships in the canal, thereby blocking it. Condemnation of the Anglo-French attack, most notably by the Eisenhower administration in the United States, led to their humiliating withdrawal. The canal was cleared and reopened after four months.

The 1967 crisis, which began with the Six-Day War, resulted in the closure of the canal for eight years. This lengthy period provides useful evidence of the impact of such a closure, evidence that has been neatly analysed by James Feyrer and summarised in an article for VoxEU.

Feyrer begins by working out the average increase in shipping distances between countries caused by the canal closure. For any given country, these increases can be weighted by trade flows to give an average effect. For a few countries, like 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 x 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 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, ten times the cost to Britain of the blocking of the Suez Canal.

To compare these two numbers properly, we need one more piece of information, which is more speculative than those discussed so 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 since the end of the second world war, Suez in 1956, produced exactly the outcome it was supposed to avoid.

Advocates of military expenditure can always argue that it’s only because of powerful navies like that of the United States that we don’t see lots of attempts at closing sea lanes. This argument, like the case of Lisa Simpson’s tiger-repelling rock, 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 (US$5.3 trillion on one authoritative estimate) is very large. But the great majority of this trade (around US$4 trillion) is going to or from China. Obviously, the Chinese government can control this trade in any way it chooses using domestic policies, and has no interest in blocking it. The remaining US$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, but attempts to pin them down to concrete realities are generally ignored. The century beginning with the first world war 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 fact hasn’t stopped these wars, and preparation for wars, being considered an essential part of a national economic strategy, and it seems unlikely to do so in the future. •