Commentary

China has once again increased its defense budget, citing rising security threats from the United States. Although calculating and comparing military spending is complex, estimates still suggest that China’s military budget lags far behind that of the United States.

Beijing has warned that it is ready for “any type of war“ with the United States as tensions escalate over trade tariffs. President Donald Trump has imposed tariffs on all Chinese goods, prompting China to retaliate with 10–15 percent tariffs on U.S. farm products. In a statement, China’s Embassy in Washington declared, ”If war is what the U.S. wants ... we’re ready to fight till the end.”

At the annual meeting of China’s rubber-stamp legislature, the National People’s Congress, Premier Li Qiang announced on March 5 a 7.2 percent increase in China’s defense budget, matching last year’s figure. He warned of “changes unseen in a century” and framed China as a stable power, contrasting with U.S. involvement in conflicts in the Middle East and Ukraine.

Despite a slowing economy, China Daily, a Chinese Communist Party (CCP) mouthpiece, defended the increase as “reasonable“ and ”restrained,” noting that China’s defense spending has grown steadily under 10 percent annually since 2016.

China’s military budget now stands at 1.78 trillion yuan ($246 billion), the world’s second-largest, yet it remains below 2 percent of GDP—far less than Russia (5.9 percent of GDP) or the United States (3.4 percent of GDP). Analysts, however, suspect China underreports actual spending. Meanwhile, Washington continues to pressure allies like Japan, South Korea, and European nations to raise their military spending to at least 2 percent of GDP.

Although the exact details of China’s defense spending remain undisclosed, the RAND Corporation identifies key factors that will determine whether China can develop a military capable of challenging U.S. interests in Asia: sustained economic growth, efficient allocation of resources to the military, and continued modernization of its defense industry.

While China’s economy is not expected to grow as rapidly as in past decades, RAND projects an average annual growth rate of 5 percent through 2025, aligning with the target set by the National People’s Congress. By then, China’s economy is expected to be about half the size of the U.S. economy.

However, as China’s population ages and urbanization accelerates, the regime will face increasing demands for social spending on pensions, health care, and infrastructure, potentially limiting funds available for military expansion. RAND said that military spending could diverge from expectations if China’s GDP growth deviates by more than 2.5 percentage points from projections for three consecutive years or if defense industry reforms stall.

Despite these constraints, China’s defense industry continues to modernize, though it still lags behind Western military technology. With a current military budget of $245 billion, China spends approximately 28.82 percent of the U.S. defense budget of $850 billion, keeping its overall defense expenditure far behind that of the United States.

Comparing the actual amount the United States and China spend on defense is far more complex than simply looking at their nominal budgets. Analysts often miscalculate China’s defense spending, largely due to purchasing power parity (PPP)—the principle that goods and services, especially labor, cost significantly less in China than in the United States.

For instance, the average salary in China is about $1,000 per month, while it is closer to $7,000 in the United States. This means that for the same expenditure, China can hire seven workers for every one U.S. worker, allowing its defense budget to be far more efficient despite being lower in absolute dollar terms.

When adjusted for PPP, China’s defense budget appears roughly equivalent to that of the United States. However, not all military expenses benefit from lower domestic costs. Imported technology, raw materials, components, parts, and finished goods must be paid for in real, nominal dollars, making them significantly more expensive for China than for the United States.

This reliance on foreign imports weakens the overall impact of China’s defense spending, as a portion of its budget is diluted by higher costs in the global market. An analysis of China’s military hardware and assets reveals that the PLA lacks the necessary ships, planes, and other major systems it would be expected to have if its defense spending were truly comparable to that of the United States.

Other errors in estimating China’s true defense spending include failing to account for expenditures outside the official defense budget. For instance, China’s People’s Armed Police and Coast Guard are excluded from its defense budget. Yet a fair comparison would require recognizing that the U.S. Coast Guard budget is also excluded from U.S. defense spending, as it falls under the Department of Homeland Security.

Similarly, defense research and development (R&D) spending is often misrepresented. China’s official budget does not include all defense-related R&D, yet some analyses fail to account for this while excluding comparable off-budget U.S. R&D spending. Additionally, China’s “military-civil fusion” spending, which integrates civilian industries into military development, also falls outside its defense budget.

Making an exact comparison between U.S. and Chinese defense spending is complex. However, recent developments indicate that China is steadily increasing its military budget, with the long-term goal of surpassing the United States as the dominant global military power. In response, the United States must continue investing in defense to maintain its strategic advantage.

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