Home > Economics - General, Oz Politics > Keeping Sea Lanes Open: A Benefit Cost Analysis

Keeping Sea Lanes Open: A Benefit Cost Analysis

March 20th, 2016

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 my latest 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 analyzed 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 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, like that of Lisa Simpson’s tiger repelling rock https://www.youtube.com/watch?v=fm2W0sq9ddU, 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.[^1] 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.

[^1]: Someone who took the “sea lanes” argument seriously might conclude that China had 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.

Categories: Economics - General, Oz Politics Tags:
  1. bjb
    March 20th, 2016 at 18:55 | #1

    I would have thought that any analysis of the cost of shipping and distance before the current total containerisation of cargo and super efficient mega container ships was rather irrelevant.

  2. Collin Street
    March 20th, 2016 at 19:29 | #2

    > I would have thought that any analysis of the cost of shipping and distance before the current total containerisation of cargo and super efficient mega container ships was rather irrelevant.

    But we know that the effect of a marginal increase in cost component A is proportional to the fraction of the final cost that cost component A represents; if shipping has fallen in real terms, if it represents less of the final cost, then the impact that a given disruption to shipping represents must also have fallen.

  3. Ikonoclast
    March 20th, 2016 at 20:01 | #3

    Here’s an interesting claim;

    “We really don’t know for sure, but results from US Navy SINKEX exercises (operations in which the Navy tries to sink older warships) suggest that 100,000+ ton vessels can absorb multiple missile and torpedo hits without sinking. Accidental bomb detonations on US aircraft carriers during the Vietnam War back up this assertion. During the Tanker War (the naval component of the Iran-Iraq war), only 23% of the tankers that were hit sunk or were declared a total loss.” – Jay Arron, Strategy Game Designer.

    Does a strategy game designer know enough to say this? I don’t know but some of those guys do quite a bit of research on such issues.

    A more credible source says;

    “The key lessons and issues raised by the (Iran-Iraq tanker) war may be summarized as
    follows:

    – The tanker war was the most important aspect of the fighting at sea, but it
    never produced a major interruption in Iran’s oil exports. Both for political and
    military reasons, Iraq never achieved the concentration of force necessary to
    severely reduce Iran’s exports on a sustained basis, and lacked the targeting
    assets and the ability to use sufficiently lethal weapons to achieve decisive
    results.” – CSIS. (Centre for Strategic and International Studies. IIRC.)

    Of course, the US Navy was there trying to keep sealanes open and no doubt Iran contested Iraq’s efforts at sea. Nevertheless, strangling a nation by interdicting sea lanes seems to be a tough business in the modern world. J.Q. may well have a point. However, don’t expect any argued for savings on navies to go into infrastructure, welfare or anything sensible. It will probably just get directed to air force and army. Sorry, but I am a terrible cynic.

  4. March 21st, 2016 at 10:49 | #4

    That’s all well and good, but you’re overlooking my fantasy that a modern day Captain Nemo could usefully utilise a submarine fleet for torpedoing coal and oil tankers in the coming climate wars. (The uncomfortable Brisbane summer which refuses to end is encouraging this daydream.)

  5. Jim
    March 21st, 2016 at 11:28 | #5

    As John points out, China would not shot itself in the foot by sinking vessels carrying cargo to / from China. So the actual risk the subs might reduce is probably only Australia’s trade with South Korea. So do you divert shipping, or build and operate subs to mitigate the risk?

    Pocket calculator time……

    The worst case (longest) shipping diversion to effectively reduce the risk to 0% would add about 1,300km to the trip between Incheon and Australia (via the Japanese Tsugaru Strait). Australia’s merchant shipping trade with South Korea totals about 96 million tonnes per annum. The basic rule of thumb cost for sea freight is about 3 cents per net tonne kilometer. So the cost of a 100% loss of sea lanes through the South China Sea is about $3.8B per annum in additional shipping costs. It sounds like a lot, but it equates to about a $60 price increase on a new Hyundai car. Hardly the stuff of major trade disruption.

    But the cost of the subs attracts an interest bill of about $2.5B per annum ($50B x 5%), and I assume the annual operating and maintenance cost would be similar (probably more). The total cost of subs is about $5B per annum with a lower probability of eliminating risks to trade.

    So the sub option costs more, has a lower chance of reducing risk than commercial shipping diversions, and raises tensions in the region even more (adding further costs).

    Pocket calculator 1. Defense White Paper 0.

  6. Newtownian
    March 21st, 2016 at 11:31 | #6

    What a curious contention.

    Can I suggest a better place to start would have been to ask first if the military as a whole is obsolete?

    As much as I like the old Danish Silly Party’s proposed defense budget of $6 for a tape in Russian saying “We surrender, We Surrender”….such enlightened policy does not seem likely any time soon, if only because we live in a neoliberalism dominated world where competition is inevitable as resources shrink and separately because as prior to WWI competition has been sanctified in the form of a winner takes all mindset which is all to evident in the current crop of politicians. So I guess we must be realistic and assume for the time being a War Department is a inevitable evil.

    If you accept the latter, then the real question if what format and size the military should take and then a larger more comprehensive set of arguments is required to identify the right balance given shifting politics. As a result the better question is what should be the roles of the different branches and their interactions, what is the best way each can contribute and how does a navy fit into this.

    Could the navy be eliminated? For what its worth a good case can be made for saying most of the military has been made largely obsolete by nuclear weapons…..but interestingly one of the most cost effective ways for operating these would be to install them on relatively cheap expensive cruise missiles lauched from submarines so even this doesnt automatically make the navy obsolete.

    Fortunately or otherwise it seems accepted that solely employing holocaust as the ultimate threat isnt great and border spats are a better way to let off steam so as to avoid that oxymoron – we destroyed the world in order to save it.

    Now we come to the heart of the real rationales for a navy. Some borders are maritime and we dont really know what the future will bring so we need to allow for all options. This is the case here and with plenty of nations identified in war games/conflict scenarios. So really given their role, its hard to see navies as not being part of our war making capacity. If this was about border ‘defense’ of fortress Oz a case might be made for obsolescence. But we are talking here about war making as well as defense capability.

    The above aside a separate question which seems to be actually the one posited is whether the current naval spending is sensible? That’s fair….but it does not imply obsolescence but rather misplaced priorities which is a different beast. And when you look at how so many resources were wasted on the Dreadnought race, a fascinating one into the madness of following the default logical decision path which an economist or two might consider.

    So I’m sorry John your arguments at present seem too much along the lines of Mao’s old paper tiger argument to which Nikita replied “(sorry but) the paper tiger has nuclear teeth (so your argument is interesting but irrelevant)” https://en.wikipedia.org/wiki/Paper_tiger.

  7. Newtownian
    March 21st, 2016 at 11:35 | #7

    Correction that should have been the Danish Peace Party http://www.smh.com.au/federal-politics/were-back-in-business—maybe-20090508-ay24.html

  8. John Quiggin
    March 21st, 2016 at 13:48 | #8

    @Newtownian

    I honestly can’t make any sense of this. Can you boil it down to a couple of paras?

  9. J-D
    March 21st, 2016 at 14:49 | #9

    @Newtownian

    Nope.

    Your source wisely does not write ‘the Danish Peace Party’ but rather ‘the Danish peace party’, signalling that the writer is relying on a recollection that is only partial and hasn’t gone to the trouble of looking up the source and getting the exact name.

    That source is Danish lawyer and famous tax avoider, Mogens Glistrup, who founded the Fremskridtspartiet, usually translated into English as ‘Progress Party’, most associated in its early days for its advocacy of abolition of income tax but later most associated with its opposition to immigration. Glistrup’s suggestion that Denmark replace its defence department with a recorded message saying ‘We surrender’ in Russian was incidental (although perhaps typical of the man).

    (The Progress Party is no longer represented in the Danish Parliament, but the Dansk Folkeparti — Danish People’s Party — which split from it is currently the second largest party there.)

  10. Jim
    March 21st, 2016 at 15:44 | #10

    @Newtownian Newtonian

    I agree that navies are not absolutely obsolete, but conventional subs (as proposed) in the Australian context are.

    The legitimate roles for the Australian Navy in descending probability of need are:
    1) Disaster relief in our region (as we’ve recently seen in Fiji).
    2) Contributions to peace missions (where our naval skills and capacity are incorporated into a multinational pool of capacity).
    3) Protection of shipping lanes (e.g. South China Sea).
    4) Protecting Australia’s borders (they started it).
    5) Attacking other nations (we started it).

    Subs are of no use for role 1; of virtually no use for role 2; and are not economically viable for role 3 (as previously discussed in this thread). The probability of triggering the need for role 4 is virtually 0% (why go to the expense of attacking Australia when it is cheaper to buy the bits you want?), and the effectiveness of subs in protecting Australia’s borders when compared to other defense options (including air and land) is questionable. I’d argue the probability of role 5 is actually 0%.

    So the future of the Navy’s needs is probably more for small, multifunctional, and cost effective vessels that are primarily used for aid and peace keeping support. Even Australia has the capacity to build those!

    Conventional subs just shouldn’t get a look in. And economic analysis should always play a role in these sorts of decisions.

  11. March 21st, 2016 at 16:06 | #11

    Ikonoclast, there is plenty of evidence that large ships, including oil tankers are hard to sink, including the example you gave. A difficulty with sinking oil tankers is that they are full of buoyant liquid when loaded, so being holed at or below the waterline means oil will be trapped in the upper part of the tanker, helping to keep it afloat. And being holed above the waterline causes oil to pour out which lightens the ship and raises the hole higher above the waterline. Virtually all oil tankers are now double hulled and have multiple compartments, so poking a hole into the not at all creamy center can be tricky along with holing enough compartments. And empty oil takers can have a lot of water enter them and still stay afloat. Depending on the situation, enough water to fill 80% of an oil tanker. Putting holes in the tops and sides of enough compartments could get the job done, provided there isn’t a middle deck, but starting a fire that overwhelms fire control is likely to be an easier option for sinking loaded tankers. Unfortunately that might not be too difficult to do these days.

    In 2014 a Libyan oil tanker was set on fire with rockets. And rockets aren’t even necessary. in 1991 in an environmental disaster with the coolest name ever, the Mega Borg oil spill, the oil tanker Mega Borg managed to catch fire and explode all by itself.

    Of course, the easiest way to prevent oil tankers being sunk is to not have any. Instead of spending tens of billions on submarines we could instead eliminate the need to import oil at far less cost, in fact this should save us money, and if we wished we could probably do it before the submarines could be built. That would mean there would be no bulk strategic good Australia would need to import in the event of a major war. So I would say this should appeal to people who think a World War III fought with conventional weapons and naval engagements is likely possibility, but perhaps some of them are looking forward to it and would not appreciate the number of things that could be blown up being reduced.

  12. March 22nd, 2016 at 09:04 | #12

    Actually, explode is too strong a term for what happened to the Mega Borg. There was an explosion and later on more explosions and the ship was a write off, but it stayed on the surface burning for many days. Four crew were killed and 17 injured out of a total of 41. A big crew – Exxon Valdez had 20. And I got the date wrong by a year. The Norwegian tanker suffered an explosion on June 8th 1990. According to a report I read the Mega Borg was towed to Pakistan to be scrapped.

    But the evidence clearly supports me when I state that on June 8th 1990 there was an explosion on an alien controlled ship called the Mega Borg that led to its destruction.

  13. Newtownian
    March 22nd, 2016 at 14:49 | #13

    @John Quiggin
    I’ll try to explain while apologizing for being a bit obtuse.

    The military is there to fight wars for territory – using people and devices that can efficiently kill enemies as a last resort without being killed one’s self. Their KPI is to preserve their nation’s territory or gain more. Territory is first and formost geographic i.e. land, sea, sky . So depressingly as long as the sea exists and we humans use it and compete for what it offers it will be fought over and a navy of some sort will exist.

    A complication in this is how the military deals with/responds to nuclear war prospects. This risk of conflict is now worse than ever with proliferation India and Pakistan and submarines are part of this calculus as they are arguably still the most invulnerable ‘delivery system’ for these abominations. Thus its hard to see how a navy or submarines will disappear any time soon.

    @J-D

  14. Newtownian
    March 22nd, 2016 at 15:08 | #14

    @Jim

    You lost me at point 5. Submarines would seem to have a role here and with function 4. Happily, we currently live in time when people dont seem to want to rip one another apart. Or do we? Will this last?

    A traditionally useful touchstone/starting point for discussion is the clock of the Bulletin of Atomic Scientists: https://en.wikipedia.org/wiki/Doomsday_Clock Currently its set at 11:57 the same as it was in 1984 when thanks to Pershing and cruise missile deployment it was at its worst point other than the height of the Cold War in the 1950s. The reason given is “made in January 2015 due to “[un]checked climate change, global nuclear weapons modernizations, and outsized nuclear weapons arsenals. This setting was retained in January 2016”. Bit of a worry what.

  15. Newtownian
    March 22nd, 2016 at 15:11 | #15

    @J-D
    Thanks for setting me straight….I remembered the story from the late 1970s but had trouble tracking down any primary material.

  16. John Quiggin
    March 22nd, 2016 at 16:57 | #16

    @Newtownian

    So depressingly as long as the sea exists and we humans use it and compete for what it offers it will be fought over and a navy of some sort will exist.

    1. This isn’t true, at least for the last 70 years. There have been a few instances in which navies have been peripherally involved in land wars, but I’m not aware of any instance of fighting over control of sea. Can you name one? If not, wouldn’t your logic suggest spending more on armies and less (or nothing) on navies.

    2. Your whole post assumes that this kind of fighting over territory makes economic sense, at least for the winners. You don’t engage with the argument of the OP, you just assert the contrary with zero evidence.

    3. See if you can spell out your argument, on the specific issue of sea lanes, and without relying on tiger repelling rocks.

  17. J-D
    March 22nd, 2016 at 17:13 | #17

    @Newtownian

    If we start from the assumption that the general purpose of the military is to fight wars for territory, then the natural progression of reasoning leads to this: the most suitable specific configuration for the specific Australian military is one specifically adapted to the specific kinds of wars for specific territory that Australia is likely to fight.

    So which do you suppose those are, and why?

  18. James Wimberley
    March 22nd, 2016 at 18:14 | #18

    There is a sea lane conflict going on at the moment: Somali pirates in speedboats versus everybody else. The pirates, poor and laughably ill-equipped, have done remarkably well. The Rest if the World team have helped them by poor coordination. Warfare really does need autocracy in the form of a single chain of command. Navies seem less willing than armies to work together under a UN mandate.

    The prospective sea lane conflict is the Straits of Hormuz in a conventional US war with Iran. The Iranians win this hands down. They have far more and better speedboats than the Somali pirates, and it is far easier to wreck an oil tanker than to hijack it.

  19. March 23rd, 2016 at 11:54 | #19

    The interesting thing about the response to Horn of Africa piracy is how incredibly expensive it has been to use naval vessels including destroyers, frigates, and amphibious assault ships when what the area really needed was just a hefty coast guard plus the use of someone’s satellite reconnaissance. It was almost as if the world’s navies were desperate for something, anything, to show they could be useful and hang the expense. It’s another clear example of how useless modern navies are in terms of cost. Now that piracy in the area has mostly been stopped, there appear to be attempts to save on costs by making security operate more like a coast guard.

    What is particularly tragic is the yearly cost of the anti-piracy task force could have potentially saved hundreds of thousands of lives in Africa.

    But the piracy was not a sea lane conflict, it was piracy, which made it crime. It was parasitic behavior that relied on not “winning”. If the pirates won control of the sea lane they would lose because then no ships would use that sea lane. That sort of end game would only work if they had been in a position to charge ships for safe passage, as the Barbary Pirates did, and they were never going to be able to do that. So to be successful pirates they would have had to not win control of the sea lane and keep the costs of piracy low enough that ships would keep using it, and not invite an international response in the form of navies from all over the world that were apparently spoiling for a fight. They failed and piracy in the region is now a tiny fraction of what it was.

    On March 16th 2015 Somali pirates managed to hijack an illegal fishing trawler. This was apparently the first hijacking they had accomplished for 3 years. And since the vessel was fishing illegally in Somali waters, it appears to have been an act of piratey vigilantism. Or if you prefer, spontaneous coast guarding. Note that hijacking is only one type of pirate act and so it does not mean there was no other piracy for 3 years.

  20. March 25th, 2016 at 11:36 | #20

    I would be grateful if you signed me up for new posts by email. RS

  21. John Bentley
    March 28th, 2016 at 17:44 | #21

    I must admit I’m with Hugh White on this one. We have to get our policy right before we start buying the bits that go bang. To date we haven’t got this right so we’re going to spend billions on scrap metal! I’d say we’re up that proverbial creek, no paddle, no hat………………. !!

Comments are closed.