Regional Defence Economic Outlook 2021 Asia and Oceania
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Defence Economics and Materiel Supply
Regional Defence Economic Outlook 2021
Asia and Oceania
Tobias Junerfält and Per Olsson
This memo complements Defence Economic Outlook 2020 (DEO 2020), which assessed the
global power balance focusing on the major world powers, with a regional outlook on Asia and
Oceania. The memo aims to provide a regional perspective not contained within DEO 2020. Si-
milar to DEO 2020, the regional power balance in this memo is described in terms of military
expenditure and macroeconomic trends during the period 2010-2019, focusing on the five lar-
gest military spenders. Furthermore, the memo provides a description of the defence industrial
capabilities of these countries, as well as the regional security environment.
Figure 1: Asian Military Expenditure, 2019 (current prices). Source: SIPRI (2020
Military Expenditure
The Asia and Oceania region is currently home significant part of this increase can be attributed to
to four of the world’s ten largest military spenders just one country, China.
and has seen a steady rise in military expenditure The People’s Republic of China is the world’s
during the past decade. The region has increased second largest military spender and the largest in
its global share of military spending from 19.2 the Asia and Oceania region by far, see Table 1. In
percent in 2010 to 27.7 percent in 2019. A 2019, China spent USD 261 billion on its military,
FOI Memo: 7532 May 2021
Project no: A12117
Approved by: Anders Strömgrenwhich is more than half the regional total and of the South China Sea. The latter claim has been
exceeds the spending of the next four regional physic ally fortified with the extensive construc-
powers combined. During the past decade, China tion of artificial islands together with military in-
has increased its military spending by an aver- stallations and dual-purpose infrastructure. These
age of 7.1 percent annually, made possible by the actions have led to growing concerns among mari
country’s rapid economic growth. Both China’s time neighbours and rival claimants, some of
military spending and economic growth rates have which, e.g. Vietnam, have responded with fortifi-
slowed in recent years, but are still substantial and cations of their own.
higher than most other countries in the region. In the East China Sea, both China and Japan
claim the Senkaku/Diaoyu islands, under Japa-
Table 1: Top 5 Military Spenders in Asia and Oceania, 2019.
Source: SIPRI (2020). nese administration, which from time to time has
sparked tensions between the two nations. Japan
Country Billion Share of Share of Average Average
USD change change views the continuation of activities in the area by
region
(current 2010-19 2017-19 the Chinese Navy and Air Force as an attempt to
prices) (%) GDP (%) (%) (%) change the status quo through coercion, a lthough
China 261.1 50.5 1.9 +7.1 +5.7 not through direct force. China’s growing strength
India 71.1 13.8 2.4 +3.6 +4.7 and increased assertiveness have also accelerated
Japan 47.6 9.2 0.9 +0.2 +0.0
the US security policy shift towards Asia. Among
South 43.9 8.5 2.7 +3.5 +6.3
several conflicting issues, US support for Taiwan is
Korea
Australia 25.9 5.0 1.9 +2.4 -0.2
of greatest concern for China, which views the is-
land as a runaway province. It is the stated goal by
Meanwhile, India has increased its military expen- the Chinese Communist Party to take control over
diture to become the region’s second largest spen- Taiwan by 2049, by military means or otherwise.
der and third in the world, accounting for USD 71 North Korea, more specifically its nuclear and
billion in 2019. Although its spending levels have ballistic missile programmes, is another focal
been virtually stagnant during the past decade, Japan point of regional security in East Asia. Since the
is still the third largest military spender in the region. meeting between former US President Donald
South Korea has increased its military e xpenditure Trump and North Korean Chairman Kim Jong-un
steadily during the same period, an increase that has in June 2018, negotiations regarding denuclearisa-
accelerated in the last few years. Australia is the fifth tion of the Korean Peninsula have stalled. North
largest spender in the Asia and Oceania region, ha- Korean missile tests have been resumed and con-
ving increased military expenditure during the past ducted on a number of occasions, albeit not fea-
decade but decreased somewhat in the last few years. turing long-range ballistic missiles. North Korean
officials indicate that a security guarantee would
Regional Security be a prerequisite for denuclearisation, in addition
The security environment in the Asia and Oceania to the recurring demands of UN sanctions relief.
region has for the past decades been dominated However, given that the North Korean regime see
by the growing power of China. The rapid and nuclear weapons as the only hard guarantee aga-
sustained increase of the Asian giant’s military inst invasion, the actual likelihood of voluntary
spending has enabled an extensive modernisa- denuclearisation is debatable.
tion of its armed forces. China has also become The increased tensions in East Asia have re-
increasingly assertive in advancing its territorial sulted in deepened military ties between the US
claims in the region, which includes Taiwan, the and its regional allies and partners, such as J apan,
Senkaku/Diaoyu Islands and more than 80 percent Australia and India. Other countries, such as the
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SE-164 90 StockholmPhilippines under President Rodrigo Duterte, has strived to amend the constitution since the
have taken a more China friendly and US scep- party was founded in 1955, but has thus far failed
tic stance, even though continued territorial dis- to achieve the necessary consensus in parliament.
putes in the South China Sea might obstruct the India has traditionally prioritised its army over
deepening of ties with China. Thailand, under other military branches. This in large part due
the current military leadership, has also sought to the country’s historical border conflicts with
to balance its traditionally close relationship with Pakistan and China, as well as the need to con-
the US with closer ties to China. Thailand has trol internal insurgencies. However, an increased
for instance signed deals for Chinese tanks and priority of air and sea capabilities has come amid
submarines. India’s growing concerns about China’s growing
Since July 2019, South Korea and Japan have power and presence in and around the Indian
been embroiled in a trade dispute, partly linked to Ocean. In June 2020, tensions with China saw its
what South Korea views as unresolved historical first casualties in several decades when a border
injustices. The direction of this dispute is unclear, clash r esulted in 20 Indian, and a claimed num-
but there has been some spill-over on s eemingly ber of 4 C hinese, s oldiers killed. The clash has
unrelated areas, such as the South Korea threat to brought the relationship between the two Asian
leave a military intelligence-sharing pact, a t hreat giants to a new low. Meanwhile, border ten-
later withdrawn. There is also the unresolved dis- sions between India and Pakistan along the Line
pute over the Dokdo/Takeshima islands, claimed of Control in the Kashmir region remain. Ten-
by both countries but administered by South sions over continued terrorist activities continue
Korea, contributing to strains in bilateral rela- to haunt the Indo-Pakistani relationship, but re-
tions. The relationship between South Korea and cent developments between the nuclear powers
Japan should also be viewed in the context of each also include mutual airstrikes, carried out in
country’s bilateral alliance with the US, which the February 2019. In October 2019, the Indian state
two countries have to balance with their respective of Jammu and Kashmir was converted into two
economic relationship with China. separate Union Territories, Jammu and Kashmir
Meanwhile, Japan is in the midst of discussing as well as L adakh. This reorganisation means de-
revisions of its constitution connected to secu- creased self-governance and greater centralisation
rity concerns related to China and North Korea. of power and control to the federal government.
Recent developments include a reinterpretation The rapidly changing power dynamics in the
of the Constitution, referred to as pacifist, which Asia and Oceania region will likely complicate
took effect in 2016. The change enables Japan’s e fforts to improve bilateral relationships in the
Self-Defense Forces to engage in collective self-de- near future. Given the conflicting goals, both
fence, which entails the lending of military support region ally and globally, tensions between the US
to its allies, i.e. the US, in defensive purposes. and China are likely to increase and shape the
These measures are currently limited to scenarios security environment in the Asia and Oceania
which are deemed to pose an existential threat to region in the coming decade. Various countries in
Japan’s security. Prime Minister Yoshihide Suga the region seek to balance their military alliance
has stated that he intends to continue the efforts of with the US with their economic relationship to
his predecessor, Shinzo Abe, who sought to revise China. Meanwhile, China’s increasing economic
the constitution in order to consolidate constitu- and military influence in the region, including
tional support for the Self-Defense Forces and for the Belt and Road Initiative launched in 2013,
the right of collective self-defence. Prime Minister might further strain relations with nations de-
Suga’s party, the Liberal Democratic Party (LDP), pendent on secure sea lines of communications in
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SE-164 90 Stockholmthe region, such as India, Japan, South Korea, Since the financial crisis the Chinese economy
A ustralia and the US. The power balance of has been supported by public spending and cre-
the Asia and O ceania region will also depend dit expansion from state-controlled banks as well
on the future development of other relations- as shadow lenders. This has caused non-finan-
hips between major actors in and outside of cial sector debt to surge, exceeding 280 percent
the region, such as the aforementioned US re- of GDP in 2020, high for an emerging economy.
lationships to various countries as well as the Meanwhile, government debt was a more manage
Sino-R ussian relationship. able 53 percent of GDP, which could act as a sta-
biliser during a potential debt crisis. On top of
Macroeconomic Trends high debt levels, China has been embroiled in a
The economy of the Asia and Oceania region, trade war with the US since 2018. At the out-
and the region’s contribution to global economic set, the Trump administration imposed tariffs
growth, has increased steadily for decades. This on about half of all Chinese exports to the US,
development can largely be attributed to China accusing China of unfair trade practices. China in
and India, as the two countries have experienced turn imposed retaliatory tariffs. In January 2020,
average growth rates of 5 to 8 percent during the the US and China signed a “phase one” trade deal,
ten years preceding the coronavirus pandemic. which e ntailed some US tariff concessions, as well
However, Chinese growth rates have slowed as Chinese promises concerning US intellectual
steadily during the past decade, from double digit property and technology transfer protection,
in the decade prior to the 2008 financial crisis to among other things. It remains to be seen to what
about 7 percent up until the coronavirus pande- degree the Biden administration will rescind US-
mic in 2019. The pandemic hit the Chinese eco- China trade policies put in place by the previous
nomy hard in 2020. IMF estimates real economic administration, but preliminary statements indi-
growth of merely 2.3 percent that year, followed cate that immediate de-escalation is not in sight.
by a rebound of around 8.1 percent in 2021. In However, the Biden administration has stated that
the long term, the gradually slowing growth is it will put greater emphasis on coordination with
likely to continue. This trend cannot easily be US allies when dealing with China compared to
attributable to one single factor. Current growth the previous administration.
rate partly results from the backlash of the massive India has experienced high economic growth
stimulus package launched after the global finan- rates of between 5 to 8 percent during the past
cial crisis in 2009. It can also be seen as a conse- decade, even though there has been a downward
quence of the conscious efforts by the C hinese trend the past few years up until the corona
government to shift focus from high-speed in- virus pandemic. While Indian growth has pri-
vestment and manufacturing-led growth to high marily been driven by the service sector, Prime
quality growth with a more equally distributed, Minister Narendra Modi’s government has hoped
efficient and balanced economy. This economic to strengthen the manufacturing sector through
rebalancing has seen a relatively higher contribu- the ‘Make in India’ initiative. Results have been
tion to growth by the service sector and domestic mixed. Although industrial production has
consumption, sectors where productivity gains are grown steadily in recent years, manufacturing as
more difficult to achieve. However, the decreasing share of GDP has decreased slightly during the
marginal returns from previous growth models past d ecade. A standardised goods and services
coupled with continued lack of comprehensive re- tax was introduced in 2017 with the aim to en-
forms to increase productivity among state-owned courage economic activity and increase tax re-
enterprises (SOEs) also weigh on the economy. venue.Following the coronavirus pandemic, the
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SE-164 90 Stockholmeconomic growth projected by the IMF for the seems to be an a ttempt to coerce or punish Aus-
Indian economy will have been a contraction of 8 tralia economically for actions and policies seen as
percent in 2020, followed by a rebound of around adverse to China. This development should also
11 percent in 2021. be seen in the wider context of the US-China ri-
The Japanese economy is arguably the most valry, in which Australia constitutes a US ally.
advanced and mature in the region. While Ja- As trade is central for the region’s economic
pan has experienced low growth rates during growth, the various trade conflicts, not least the
the past d ecades, former Prime Minister Abe one between US and China, constitute s ources of
sought to stimulate economic growth, tackle concern. The development of digitalisation and
deflation and lower the country’s high le- robotics presents many possibilities, but also pres-
vels of public debt. As with other countries in sures Asian economies to restructure the skill set of
the region, the coronavirus pandemic adver- their labour forces. Demographics are also impor-
sely impacted the Japanese economy. IMF’s pro- tant to the future economic outlook of East Asia.
jections indicate an economic contraction of 5 Both Japan and South Korea are a lready faced
p ercent in 2020, followed by 3 percent growth with aging populations. China, with the legacy of
in 2021. The public debt level was projec- its one-child policy faces the risk of ‘growing old
ted to reach over 260 percent of GDP in 2020. before growing rich’ with a diminishing share of
The South Korean economy is fundamen- working age population, which will make it even
tally strong, but still faces long-term issues in more difficult to continue achieving high levels of
terms of adverse demographic conditions and economic growth. Meanwhile, in South Asian na-
slow growth in productivity. After experien- tions with large youth populations, such as India,
cing an average growth of around 3 percent demographic concerns are instead focused upon
during the past d ecade, the economy contrac- unemployment.
ted by 1 percent in 2020, followed by an esti-
mated rebound to 3 percent growth in 2021. Defence Industry
Public debt has increased from 29 to 42 per- China’s mainly state-owned defence industry
cent of GDP since 2010, and the IMF estima- has developed significantly over the past de-
tes there will have been an additional increase cades, enabling the People’s Liberation Army
during 2020 to around 48 percent of GDP. (PLA) to steadily reduce its reliance on impor-
Australia has seen an average growth rate ted equipment. This d evelopment has both
of around 2.6 percent during the past decade. supported, and been supported by, the rapid mo-
Meanwhile, the economy was expected to con- dernisation of China’s armed forces. Some esti-
tract by 3 percent in 2020 followed by 3.5 per- mates suggest that the Chinese defence industry
cent growth in 2021. Public debt has gone from could very well be the second-largest arms pro-
20 to 46 percent of GDP during the past decade, ducer in the world. However, the lack of trans-
and it is estimated that this ratio will increase parency regarding arms sales makes definitive
further following the coronavirus pandemic, to assessments about the exact size of China’s de-
around 70 percent of GDP in 2021. US-China fence industry difficult. Nevert heless, the indu-
tensions pose risks to the Australian economy, stry includes large conglomerates such as aircraft
which is highly exposed to China, even though producer AVIC, ground equipment and ordon-
the impact thus far has been limited. Further- nance producers NORINCO and CSGC, electro-
more, China and Australia are also in the midst nics producer CETC, as well as the shipbuilder
of a trade conflict of their own. In 2020, China CSSC, which in November 2019 merged with
targeted the latter with trade sanctions, in what China’s other large shipbuilding c ompany CSIC.
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SE-164 90 StockholmChina currently produces all of its naval vessels support the Indian defence industry, the govern-
domestically, although it still depends on imports ment introduced new procedures in 2016 for pro-
of some key naval components. China has ex- curing military equipment as part of the ‘Make
panded its navy rapidly and is a global leader in in India’ initiative. The goal is to achieve incre-
commercial shipbuilding. The Chinese defence ased technology transfers when procuring from
industry also provides the PLA with most of its foreign companies and encouraging joint ven-
ground weapon systems. The military aviation in- tures. If s uccessful, this would mean a departure
dustry provides most, but not all, of the PLA’s from past developments as India’s defence indu-
aircraft, some of which are imported from Russia. stry has so far neither succeeded in meeting the
The aviation industry has benef itted from invest- needs of the country’s own armed forces nor in be-
ments made within the commercial aircraft sector, coming a major player on the arms export market.
which also comes with a decreased reliance on As part of the effort to increase domestic defence
f oreign-sourced components for military aircraft. industrial capabilities, the Indian government set
As part of the effort to support further military up two ‘defence industrial corridors’ in 2018. This
modernisation, recent years has seen an increased in order to create collaborative clusters of defence
focus from the Chinese leadership on military- companies. India also strives to facilitate increa-
civil fusion (MCF). As of 2015, this approach has sed defence exports.
been declared a national strategy. By integrating Due to a set of strict export rules, Japan’s de-
technology development from the civil sector and fence industry has relied on demand from the
the defence sector, the goal is to achieve mutual country’s own Self-Defense Forces. The transfer
benefits such as higher rates of innovation and of defence equipment and technology abroad was
cost efficiency. Other steps or strategies contribu- restricted in the late 1960s, followed by what was
ting towards increased self-reliance in the defence essentially an overall ban in 1976. Japan however
sector include the ‘Made in China 2025’ strategy, loosened restrictions on arms exports in 2014, en-
with the stated aim to indigenise technology pro- abling arms transfers and international coopera-
duction in a variety of industries. tion within the defence sector. Further changes in
Despite the continued progress made in the the implementation of the arms transfer principles
Chinese defence industry, the country still relies are to be expected, in order to ‘promote appro-
on import of some key components and techno- priate overseas transfer of defence equipment’.
logies, primarily from Russia. China could still be However, Japan’s export ambitions may face
characterised as a ‘fast follower’ or a niche inno c hallenges due to the defence industry’s inexpe-
vator, rather than a ‘true’ innovator. However, be- rience in international negotiations and expensive
ing leading in some niches may be enough for products compared to competitors. State initiati-
China to gain asymmetric advantages, for instance ves to promote international defence partnerships
in terms of anti-ship ballistic missiles. will likely remain vital, considering the close rela-
India was the world’s second largest arms im- tionship between the state and large conglomera-
porter, after Saudi Arabia, during the period 2015 tes, which dominate the Japanese defence industry.
to 2019. This reflects both the increased military A signature development aimed at improving do-
spending and modernisation of India’s armed for- mestic defence production and procurement ca-
ces as well as some of the shortcomings within the pabilities in recent years is the establishment of
country’s domestic arms industry. India’s foremost the Acquisition, Technology & Logistics Agency
source of arms imports is Russia, but there is an (ATLA) in 2015. The scope of this new govern-
ongoing policy focus towards supplier diversifi- ment agency includes tasks related to research and
cation, i.e. more Western suppliers. In order to development (R&D), procurement and defence
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SE-164 90 Stockholmexports. The Japanese Ministry of Defense and the Summary
Self-Defense Forces will also encourage technology Asia and Oceania’s regional share of global
interchange between the defence industry and the m ilitary spending has increased during the past
civilian s ector. While continuing to increase im- decade, largely, if not solely, due to China’s steady
ports of F-35 combat aircrafts from the US during military modernisation and expansion.
the last five-year period, Japan also seems to be Recent developments in regional security are
pushing for a domestically led development of largely shaped by the rise of China, even though
a sixth-generation stealth fighter with assistance ongoing regional conflicts and disputes also have
from US defence company Lockheed Martin. historical causes, dating back to World War II and
In the past few decades, South Korea has emer- its aftermath. This includes issues such a sterrito-
ged as an advanced defence industrial nation, able rial disputes, the political status of Taiwan, the
to serve its armed forces and expand to export division of the Korean Peninsula, and b order
m arkets. Increased sales during the past decade conflicts in South Asia. The increased US p olicy
can mainly be attributed to acquisitions by the focus towards the region, as well as China’s
own armed forces, stemming from height ened se- growing economic strength and military capa-
curity concerns, even though there was a slump bilities are likely to remain key factors in shap-
in sales during the last couple of years. South ing regional developments in the years to come.
Korea has also experienced some successes on the Economic growth in the Asia and Oceania re-
international defence market. While there are gion has continued to reshape the global economy
prospects of further exports, the South Korean de- during the past decade, with China and India as
fence industry still relies on US and other Western obvious front-runners. The covid-19 pandemic,
countries for many components. In fact, coopera- originated in Wuhan, China, has left its marks
tion with Western defence industries has been one on the economies in the region. However, some
of the large success factors for the South Korean countries, including China itself, are estimated
defence industry. Some regulatory changes a imed to have pulled through r elatively unscathed com
at improving the conditions for the country’s de- pared to other parts the world. Even though swift
fence-industrial base have been made in recent economic rebounds are expected across the region,
years by the South Korean Defense Acquisition the long-term conseq uences of the pandemic re-
Program Administration (DAPA). These changes main to be seen. The f uture d irection of ongoing
include updating its offset policy, expanding its trade disputes are likely to affect regional econo-
import substitution programme and launching mic growth at least in the short term, whereas
a plan to support military R&D development in low birth-rates and aging populations, especially
small and medium enterprises (SMEs). in East Asia, are examples of long-term challenges.
Australia was one of the largest arms impor- In terms of defence industrial developments,
ters globally during the period 2015-2019, ran- the trend in the region is clearly towards a higher
king fourth after Egypt and ahead of China. The d egree of national self-reliance. India, and to a
main bulk of arms imports were derived from lesser extent China, are still dependent on imports
the US. Even though Australia still relies on im- of equipment and components, especially from
ports for the majority of its key defence equip- R ussia. Meanwhile, Japan, South Korea and
ment, the Australian defence industry is also Australia also still depend on foreign sources,
growing. ASC Shipbuilding and Austal are its mainly Western and primarily the US, for their
forem ost shipbuilding companies. Austal, which defence equipment. However, these countries are
has its main production facilities located in making efforts towards increased domestic defence
the US, also provides vessels for the US Navy. industrial capabilities.
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