May 16, 2025: There is a dispute inside the U.S. government over exactly how much China is spending on defense. Last year worldwide defense spending reached a new high of $2.46 trillion. As it has been since World War II, the U.S. had the largest budget of $916. The first trillion dollar defense budget is fast becoming a reality. The American budget maintains a force of 1.3 million personnel. The Chinese defense budget is $296 billion to maintain two million troops. It is believed the annual Chinese spending is even higher because billions in additional defense funds are concealed in other parts of the national budget. China could be spending as much as $400 billion a year.

Chinese defense spending is not a new problem; it occurred, for the same reasons, during the Cold War with regard to the Soviet Union's military spending. The problem was, then and now, that the economic and accounting systems of the U.S. and its adversaries were so different that comparison was difficult, and required a lot of compromises and assumptions.

China, like the late Soviet Union, is a communist dictatorship, and not subject to having their numbers audited, or scrutinized by journalists. But that's only part of the problem. Chinese troops get pay, and benefits, at a much lower level than their American counterparts. Many of the Chinese weapons are Chinese made, and cost far less than comparable weapons used by the United States.

As a result there is a major problem comparing a defense dollar spent in the U.S. versus one spent in China. This also leads to an even more crucial problem, measuring the effectiveness of the American and Chinese armed forces. For the military planner, this is the ultimate question. This rarely gets reported on, because talking about the size of the defense budget is, to journalists, easier to deal with. But, as you can see, this is not the case. Finally, let us not forget that, after the Soviet Union collapsed, the actual size of their defense budgets was subjected to a serious investigation. It turned out that even the Soviets didn't know how much they were spending, but knowledgeable estimates put it at twice what anyone had thought during the Cold War.

Military budgets aren’t all they appear to be. While the United States alone accounts for over a third of the annual defense spending worldwide, this is not as overwhelming as it appears to be. There are several very practical reasons for this misperception. First there is the purchasing power parity or PPP, the relative cost of common goods in different countries. If you take into account PPP, those nations with lower costs like China and India, loom larger as defense spenders. They get more for the money spent, at least theoretically.

Without PPP the top five in military spending are the United States, China, Russia, India and Saudi Arabia. Adjust for PPP and China remains in the top five and the U.S. comes in second. That’s because things like local supplies and labor are much cheaper in China than America. Applying PPP also makes American defense spending much less effective compared to what China spends. Thus without PPP American defense spending is closer to 20 percent of global spending.

Adjusting for PPP Chinese defense spending goes from a quarter of what America spends to over 70 percent. Yet American forces deploy many more high tech weapons than China. That’s because U.S. defense spending has been the highest in the world since the 1940s. Since major items of military equipment like ships, aircraft and armored vehicles have useful lives of over 30 years, the Americans have had plenty of time to accumulate a much larger arsenal of expensive equipment than China. But that will change in the future because Chinese annual defense spending has nearly tripled in the last decade. Thus if China keeps its defense spending high and relative costs low, it will match the U.S. in many areas within two or three decades.

That probably will not happen because of other factors and trends that do not favor China and many other nations. First there is the fact that not only has the Chinese economy been growing rapidly since the 1980s, but so have wages and the costs of much else besides. Thus over time the PPP advantage diminishes. China also has a greater problem with corruption in the military than the United States and most Western nations. This greatly, by 20 percent or more, diminishes the effectiveness of their defense spending. Corruption in defense spending is found everywhere, but it has, for thousands of years, been particularly bad in China. The Chinese government has, since the late 1980s, been making strenuous efforts to reduce corruption with limited success. Other impediments to continued growth in Chinese military spending are its rapidly decreasing population and diminishing export income due to recent American tariffs. It is also interesting that Chinese unemployment has already increased to 10 percent. The combination of these three indicates deflation is underway.

There is another complication when comparing defense spending. This big one is the relative costs of defending your nation versus attacking someone somewhere else. It’s much cheaper to defend. Going on the offensive, especially over long distances, is much more expensive. Depending on how far your forces have to travel, equipping an offensive force can be anywhere from a quarter more expensive if you plan to attack a neighbor to more than twice as expensive if you are prepared to go anywhere in the world.

Then there is your military leadership. Generals and admirals who know what they are doing will maintain high standards for subordinates. They will concentrate on training and readiness for combat. Their forces will be much more effective than when, as is often the case, the military is treated like a jobs program to keep unemployment low and, if there is a lot of corruption, make politicians and senior officers rich.

Nations that spend little cash, but have cheap local costs for food, housing and payroll, like Iran and Pakistan, all of a sudden have larger defense spending. Iran is now about six percent of U.S. spending, and Pakistan about four percent. Purchasing Power Parity shows how poor nations can spend only a few billion dollars a year on defense, yet have hundreds of thousands of troops in service. If these soldiers have good leadership and train regularly, they can be a formidable foe even to a high tech force from the West. But most of the poor nations don't have high quality officers and NCOs, and their troops fade quickly when confronted with a well-equipped and well trained force. Unfortunately, the media is not very keen on examining the quality of training and leadership in anyone's armed forces. Yet, time and again, these two factors have proved to be the most critical ones. And that will remain the case in the future.