Commentary on the character of our security relationship with the US rarely examines what type of ally Australia is. We first, and often exclusively, focus on what type of ally the US is. However, the best way to calculate the impact of US policy on us—as revealed in Secretary of Defense James Mattis’s summary of the national defense strategy (NDS)—is to start with us.

We’re a unique ally. For the entirety of the Cold War and since, we alone of substantial US allies have contemplated no threat to our existence or our major interests that would oblige the US to consider an existential threat to itself as it assists us. None of its major northern hemisphere allies offer that comfort.

We’re also among the few allies of the US determined to defend themselves. This raises the threshold of American obligation further. We’re prepared in the South Pacific and, to a degree, in Southeast Asia—through alliances such as we have with Malaysia and Singapore, and agreements such as that with Indonesia—to raise the threshold again for the US. In addition, through joint facilities, we’ve been prepared to take on what might be existential burdens to render the US effective globally.

Diplomatically and militarily, we’ve committed ourselves to all facets of the social, economic and security elements of the post–World War II ‘rules-based order’. These are constructions that, while not American, sustain values to which they’ve been committed. In recent times, we’ve been prepared to commit forces for lengthy periods, particularly in struggles against Islamist terror.

Overall, our force structure has primarily been based on the exigencies of inter-state violence. The alliance has rendered our strategic environment transparent through the intelligence relationship; our weapons potent by accessing equipment from an ally staying ahead of the game; and our troops sharp as a result of training with, and being interoperable with, the best our ally can produce.

In recent times, as military forces undergo another revolution in capability and operation in cyber and space, we’ve sustained an ability to participate in the research and development of new systems. We see defence affordability, in our stretched budgetary circumstances, as resting exclusively on this US connection. The American NDS is therefore a critical document for us.

It’s rendered more critical because the Trump administration at its outset challenged many of the assumptions that were key parts of the platform on which our security has been based—particularly in attitudes to its allies and our friends in North Asia, and the rules-based order.

An early shock for us was an irascible conversation between Trump and the Australian PM. On close examination though, it was evident that Trump was venting because he realised he confronted an embarrassing legacy agreement obliging the US to take refugees from areas from which he’d decided to take none. His anger was inflamed because he saw that the character of the relationship required that he honour the agreement. The doubts cast on American commitments to other allies, and the dismissal of key approaches to the rules-based order, have been problematic for us.

In the NDS perhaps, the most comforting statement was that the US saw that its rapidly renovating joint force ‘combined with a robust constellation of allies and partners, will sustain American influence and ensure favorable balances of power that safeguard free and open international order’. Trumpism slammed into reverse. Defined further, our region, the Indo-Pacific, was top of the alliance and partnership list, ahead even of NATO: ‘We will strengthen our alliances and partnerships in the Indo-Pacific to a networked security architecture capable of deterring aggression, maintaining stability and ensuring free access to common domains.’

Less comfortable was the identification of China as an adversary. We were more at home with the Obama formula of ‘partner and competitor’. This was mitigated, however, by the return of inter-state violence as the top priority in US force structure developments. Terror was relegated, not because it doesn’t retain importance, but because from the defence point of view, current technologies and existing forces are competent for the job. The new priority sustains a focus on weapons and systems that we identify as crucial to the way we prioritise defence. The document, one of the most superbly argued and succinct I have seen, gives confidence that the focus will be sustained.

Two questions arise. The first is Trump himself: Does he understand what his defence secretary has said and is doing? His major statement since the release of the NDS, the State of the Union address to Congress, contained little about the themes in the NDS. Instead, terror and, in particular, North Korea were dealt with at length. Will the NDS be derailed by accident in the fraught tangle as the US deals with that appalling regime’s efforts to create a nuclear threat to the US? Will Trump’s efforts at rebalancing trade with friends and trading partners in North Asia impede the balances that Mattis desires? And if Mattis falls under the proverbial bus, will the NDS be sustained without him? Answers to these questions are beyond the scope of this piece.

The second question is one of affordability: Can the US afford the NDS? The short answer at the time of its release would’ve been ‘no’. That he feared ‘no’ was much in evidence in Mattis’s remarks at the time. ‘As hard as the last 16 years have been, no enemy in the field has done more to harm the readiness of the US military than the combined impact of the Budget Control Act, defense spending cuts and operating in nine of the last 10 years under continuing resolutions … wasting copious amounts of precious taxpayer dollars.’ He might have added that this handicap on sensible planning, particularly on the evolution of new weapons systems, was augmented by congressional determination to sustain useless legacy systems, facilities and unjustified emoluments for local political purposes.

Then in the last fortnight came an extraordinary budget deal that delivered more than Trump had asked for on defence, sending spending from $634 billion to $714 billion over the next two years. Caps have gone. Planning, crucial to new systems, is possible. Unfortunately, congressional backscratching remains, but its damaging effects have been lessened by the huge dollar increase. Undoubtedly, if sustained, the new defence spending makes Mattis’s objectives achievable.

Unfortunately this budget, when combined with recent tax cuts (under which the US Treasury is losing $10–15 billion per month) and with still-to-come infrastructure appropriations, is fiscal madness. The US budget deficit clears a trillion dollars. It will stay there, rising over the decade to two trillion. That’s a deficit almost the size of the Australian economy each year. The vocal director of the Office of Management and Budget, Mick Mulvaney (the equivalent of our finance minister), has been rendered mute. It’s happening when the economy is thriving, a stimulus right out of the normal cycle. Nothing like this has been done in a crisis, let alone in prosperity. In it might lie the next economic crisis. The Republican Tea Party has become a college fraternity party.

At some point such spending will have to be reined in. The Federal Reserve will start by raising interest rates. The question will arise, ‘When will they be assisted by disciplined budget measures?’ Until then, however, it has to be said that Mattis will have his resources. If the strategy in the NDS permeates the rest of the administration, particularly in trade policy and US diplomacy, then the priorities we’ve sustained over the decades for the alliance will be underpinned by our ally.

The government is expected to announce soon the successful bidder for Project SEA 1180, to replace the 13 Armidale-class patrol boats with 12 larger offshore patrol vessels (OPVs) to fulfil the maritime constabulary role, with a secondary role in military patrol and response. ASPI recently published my Strategic Insight report on the project.

Construction of the first vessel should commence in 2018 and the last vessel is expected to be delivered by 2030. The government has decided to build the first two vessels in Adelaide starting in 2018, with construction of the remaining 10 vessels to be transferred to Perth once construction of the future frigates has started in Adelaide.

This split-build process might strike the reader as an odd way of doing business. The explanation for the split-build (and the tight project schedule) is the government’s naval shipbuilding plan. The plan envisages establishing a long-term industry to build naval ships in Australia, and hopefully be competitive enough to export products and services. A key requisite of any industry is steady work and the government is using the OPV project to provide enough work to sustain a core naval shipbuilding workforce in Adelaide in the interval between completing the third air warfare destroyer and starting construction of the first frigate under Project SEA 5000.

I have argued that splitting the build has no benefit for the OPV project. Rather, it introduces inefficiencies into the construction process and increases the cost. Just because constructors can produce OPVs despite the inefficiencies doesn’t invalidate that observation.

Is the shipbuilding plan worth the additional risk that’s being assigned to SEA 1180 by the split-build? For the split-build to be a reasonable strategy, the benefits that flow from continuous construction in Australia would have to outweigh the costs to SEA 1180. ASPI and other commentators have discussed the merits of that argument—and of the economics of local shipbuilding more generally—a few times now and have raised several concerns.

First, while we don’t know the cost structures of the bids, it is very likely that naval shipbuilding in Australia carries a cost premium compared to the most efficient overseas construction. Any cost differential represents funds that could be spent on additional capability for the OPVs or something else in Defence (or schools, hospitals, or environmental adaptations for that matter). Inefficiency equals tangible opportunity cost.

Local construction might be defended on strategic grounds if it provides a sovereign capability to obtain or modify platforms and systems optimised to Australian requirements, or to sustain platforms and systems despite threats to timely international supply. But this chain of logic is undermined by the fact that most key sensors, combat management, communication, electronic warfare and weapons systems are imported even when ships are built in Australia. So much for sovereign capability. And, as a close ally of the US, Australia has identified a strategic need for interoperability, which militates against unique sovereign capability solutions. Australia’s alliance also facilitates preferred access to US defence technologies, which undermines the strategic necessity for a sovereign shipbuilding capability.

Another justification for local naval construction is national economic benefit in the form of high‑skill/high‑wage jobs and high technology. But that argument overlooks the opportunity cost of the resources diverted from other areas of the economy with higher rates of return on investment. The national shipbuilding plan was approved by government, but we don’t know if the decision was informed by an analysis of opportunity cost or whether an analysis was undertaken.

Some claim that naval shipbuilding could become efficient over the long term through exports. But exports are highly uncertain given the tightness of the naval export market. Australia (like other advanced economies) has relatively high wages, which put it at a disadvantage to lower wage-paying shipbuilders. Even the UK, with a splendid record of naval shipbuilding, has struggled to win export orders.

Australia’s fruitless collaboration with Malaysia on the joint offshore patrol combatant illustrates how a good proposal, commitment and intense effort from all levels can still be insufficient. Most countries, like Australia, tend to want to build their own vessels, irrespective of economic efficiency.

A variation on the export theme posits exports of both civilian and naval vessels. The civilian market has fewer tricky strategic and political factors that are beyond the shipbuilder’s control. However, even there, only Austal and Incat have shown sustained export success.

Overall, the justification for the risks of splitting the OPV build rests on the claimed virtues of the shipbuilding plan—but these claims rest on pretty arguable assumptions. Some of those concerns may be addressed in the promised defence industry plan (with a new sovereign defence industry assessment framework to replace the priority and strategic industry capabilities framework), and the defence export strategy. Given the cost to the defence budget, there should be keen public interest.

Just a few years ago a number of books were released which celebrated an ‘Australia moment’, where the nation was in ‘The Sweet Spot’. Today’s book titles, however, seem to run the other way, with one describing ‘how a great nation lost its way’. So let me therefore commend the ambition of Peter Jennings’ recent post on being a ‘top 20 defence player’.

While I strongly agree with the desire for a much more confident role for Australia, I have to wonder about the source of inspiration for Peter’s view. In Peter’s take, being a top 20 nation seems to mean doing the same things we currently do but with more resources. It could also be read as trying to emulate the US, but on a smaller scale. Hence the exhortations to take more of a global view and not to take our eyes off remote parts of the world less we need to jump back in. Read more

A couple of weeks ago the Pentagon announced that it had awarded a contract for another ten Virginia class nuclear attack submarines (SSNs). The headline price was US$17.6 billion, or about $1.76 billion per boat, and demonstrates a continuing reduction in unit cost of the Virginias as production ramps up.*

The development of the Virginia class is rightly seen as an exemplar of military procurement done smartly. Its development dates back to the mid-1990s, and followed on from the development of the Seawolf class, another exemplar of military procurement—but not of the good kind. The Seawolf grew out of Cold War requirements for an ultra-quiet but fast attack boat. Due to the noise generated by water flow around the hull and by the propulsion system, speed and quiet are generally an either/or proposition for submarines. Demanding both put the boat firmly on the path of conflict with Augustine’s Law VII: the last 10% of performance generates 1/3 of the cost and 2/3 of the problems.

A speaker at the recent ASPI submarine conference made the observation that ‘no system was too beautiful’ for the Seawolfs. In other words, pursuit of the highest level of performance was given priority above any thought of economical production. The result was inevitable; the Seawolf entered into an F-22-like ‘death spiral’ of higher projected unit costs and lower projected build numbers. In the end only three were built, versus 29 planned, as the 1991 cost estimate was close to US$5 billion per boat in today’s dollars. Read more

I know that my friend Mark Thomson was being somewhat tongue in cheek when sledging defence industry, but his put-downs (and defence of DMO) can’t go without a response. There’s a lot in his piece to demolish but let me start with this outrageous exaggeration:

I for one wouldn’t want to see a multi-billion dollar defence contract scribbled on the back of a restaurant napkin (or, perhaps more likely, a beer mat at a trade show).

Unfortunately, with this comment Mark seems to be channelling a view that’s gaining widespread currency within Defence: that industry is a bunch of liars, schemers and cheats always looking for ways to dud the Commonwealth. In my experience nothing could be further from the truth. During many years in industry, I’ve seen teams of highly motivated people working themselves to death—in two cases I know, literally—to deliver a product that’s often massively over-specified and required to be delivered in a ridiculous timeframe and with onerous commercial penalties for failure.

I’ve had quite senior people in Defence say ‘well, you shouldn’t have signed the contract in the first place’. This sort of out of touch arrogance typically comes from people who are salaried for life and have never experienced the real world, where staff lose their jobs if companies fail to win new work. Bureaucrats, people in uniform and—dare I say it—staff of think tanks, have rarely, if ever, faced the shock of being sacked. For those on the Government payroll, the sun rises and sets, the tides go in and out, the earth gently orbits the sun—and at the end of every fortnight there’s another taxpayer funded paycheck and another generous contribution to the guaranteed superannuation fund. Any ‘downsizing’ is done smoothly by natural attrition and most usually at the expense of contractors. Read more