Who are the Global Free-Riders?

The United States and countries in peripheral Europe are often derided as irresponsible spendthrifts. They borrowed excessively to finance government budget deficits and housing bubbles. What they couldn’t earn in tax revenue and incomes they borrowed, resulting in higher levels of public and private debt. Once the debt levels reached their limit, markets and economies around the world collapsed.

But there’s another version of this story: surplus economies with insufficient domestic demand, like Germany, relied on foreign countries (which, in many cases are less well-off) to import their products. They also relied on other countries to spend their national treasure to provide global security – a necessary and costly public good. These countries, typically seen as being peaceful exemplars of successful economic policies, are actually dependent on demand abroad and do not contribute as much to global security as countries like the United States, Great Britain, or France. Perhaps they are the real global free-riders.

Free Riding:  Geoeconomic and Geopolitical

It is well known that countries with chronic trade surpluses depend on the consumption of their trading partners.  Germany, Japan, and many upper-income countries in Northern Europe, have relied far too heavily on demand abroad.  Japan has had a sizable current account surplus since 1980.  Germany’s current account surplus recently spiked to 7.6% of GDP.  Economies that are not part of the euro, like Switzerland, Sweden, and Norway, have also had long-standing current account surpluses.

What has seldom been noted is that many of these surplus economies also free-ride on the higher military expenditures of some of their allies, particularly the U.S.  There is an evident correlation between dependency on other countries’ consumer markets and military free-riding. 

On the graph below, the 5-year average of the current account balance (2006-2010) is plotted against the military average spending of the 20 largest OECD economies.  The economies in the upper left run current account deficits (they import more from countries abroad) and also spend more on their militaries.  Those in the bottom right spend less on their military and depend on exporting their goods abroad.  The economies in the bottom right, particularly major economies like Japan and Germany, are the geoeconomic and geopolitical free-riders.

The relationship between military spending and the current account balance has deep roots in history.  After the Second World War, the U.S. and its allies discouraged the military resurgence of Germany and Japan and provided them with economic incentives to integrate more deeply into the global economy. The United States telegraphed to the world that it would protect vital shipping lanes and police the Middle East as well as be an open market to exports, all in exchange for a commitment on the part of Germany and Japan not to remilitarize and resume an independent foreign policy.

The strategy was remarkably successful: Germany and Japan remained peaceful, developed export industries, and are now two of the most productive and largest economies in the world.  The problem is that after they developed they never transitioned away from their producer-oriented ways and remained committed to low levels of military spending.

The Deal is Extended to China

What makes this historical legacy even more problematic is that the United States has extended this agreement to other developing economies, like China. The U.S. has implicitly agreed to provide a market for Chinese goods while we protect critical sea lanes and defend many of the Middle Eastern countries from which China imports its oil.

The Middle East and Africa account for nearly 80% of China’s oil imports while the United States sources only  40% of its imported oil from the these regions.  Yet the United States continues to bear most of the costs of defending the region.  In Afghanistan, Iraq, and Libya, the United States has absorbed the brunt of military costs while China has taken advantage of post-war reconstruction contracts and extraction of natural resources. What makes matters worse is that China is not an ally of the United States (unlike Germany or Japan) and its military spending is more built around confronting the United States than it is complementing it.

Of course, the United States is also to blame for imbalanced military spending. The U.S. has extended its zone of military influence since the end of the Cold War into areas like Eastern Europe and Central Asia, without a clear or convincing security rationale.  Growth in United States’ military spending is also exacerbated by the wars in Iraq and Afghanistan.  In 2000, U.S. military spending was 3.1% of GDP, but has since grown to nearly 4.7%.  While the annual level of U.S. military spending has fluctuated, the average level has remained at about 4% of GDP.

Meanwhile military spending elsewhere has fallen.  Germany’s average annual military spending fell from 1.85% of GDP in the 1990s to 1.39% in the 2000s.  During the same time periods, spending in France declined from 3.10% to 2.46% and spending in the United Kingdom declined from 3.22% to 2.46%.


The other great powers must recognize that the burden on the United States has grown too large and that it cannot continue to bear the cost of global security alone.  The world would benefit from a distribution of military spending that more accurately reflects the current distribution of global wealth.

Large, advanced economies like Germany and Japan should not be running consistent current account surpluses above 3% of GDP.  And they and other major powers should contribute their fair shares to ensure global security.  The United States, too, must come to the realization that it cannot continue to be the consumer of last resort and the guarantor of global security – our economy can no longer support it.  The U.S. cannot afford to extend the bargain it made with Germany and Japan after World War II to the entire world.  The costs on both sides are just too high.