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CHAPTER ELEVEN


Defining Trends

Data on Arms Sales Do Not Reveal Much About the Military Importance of the Arms Trade
Sales to Less-Developed Countries are Concentrated in Asia and the Greater Near East
International Arms Sellers Face a Buyers' Market
Surplus Equipment Plays a Major Role
Controls are Difficult to Establish


There is a widespread public perception that, with the end of the Cold War, defense companies are frantically looking for new markets, and that arms transfers to the less-developed world have exploded. Also, many have the impression that U.S.-based companies have been more successful than most, and that U.S. arms transfers are rising.

These perceptions are only partly accurate. It is true that competition is heating up in world markets as defense firms in the U.S., Europe, Russia, and the industrializing countries see exports as more important than in the past. However, world arms transfers have been shrinking steadily for a decade, and this is particularly true of arms transfers to developing countries.

In short, a scramble for export markets is taking place in a declining marketplace. U.S. arms deliveries have been more or less constant for a decade. But as the market has declined while U.S. exports have not, U.S. market share has increased.

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Data on Arms Sales Do Not Reveal Much About the Military Importance of the Arms Trade

In assessing the impact of arms transfers, serious analysts do not focus on financial measurements because prices vary radically with circumstances, and many sales are not meaningful in terms of combat effectiveness. A good example of the mismatch between quantitative and qualitative valuations is the sale of the bulk of the former East German navy to Indonesia at a fraction of its original value.

Nor is there a good correlation between a nation's military expenditures and the dollar amount of arms transfers to or from that country, because internal production capacity varies dramatically among nations.

The world's arms transfers are generally analyzed in terms of "agreements" and "deliveries." Agreements refer to signed contracts. Data on agreements reached during a specific year give an indication of future arms shipments, but do not tell much about actual arms deliveries during that year. Furthermore, agreements can be announced, but later cancelled or altered. Arms deliveries or shipments, on the other hand, refer to actual exports of defense equipment from one country to another during a specific year.

Sources on international arms transfers include the Stockholm International Peace Research Institute (SIPRI), which publishes figures for the rest of the world based on public sources, and data series published by the Arms Control and Disarmament Agency (ACDA) and the Congressional Research Service (CRS), which look at both public and internal U.S. government sources. SIPRI data tends to focus on transfers of major weapons platforms, while ACDA and CRS figures include all military equipment, and in some cases, training and support services as well. The CRS data base slightly understates U.S. sales because it excludes commercial transactions. Although the State Department knows the value of licenses it issues each year for commercial sales--about $1 billion in FY 1994--data on whether the licenses were actually used and shipments made is spotty.

Interpreting arms transfer data is also complicated by production licensing agreements in which one country provides another with the technology needed to manufacture a weapons system. Production licensing agreements are not included in arms transfer data, nor are shipments of commercial equipment which might be used for military production. As defense establishments increasingly turn to off-the-shelf commercial products in areas such as communications, surveillance, data processing, encryption, and night vision, this will become a more important source of weapons acquisition for importing nations.

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Sales to Less-Developed Countries Are Concentrated in Asia and the Greater Near East

About 38 percent of arms transfers since the end of the Cold War (in calendar years 1990-93) have been among the arms producing countries themselves. The remainder, classified by the CRS as deliveries to the Third World, were valued at about $89 billion in constant 1993 dollars.

Asia Pacific. Since the end of the Cold War, the nations of this region accounted for about 38 percent of arms purchase agreements by developing nations. Noteworthy agreements have included:

  • Taiwan's approximately $6 billion worth of orders from the U.S. in 1993, including sales of F-16 fighter aircraft, C-130 transports, and Harpoon anti-ship missiles.

  • Indonesia's purchase of 39 second-hand warships from Germany, including three submarines.

  • Malaysia's acquisition of Russian MiG-29 fighters, making it the first country in Southeast Asia to acquire these aircraft, and its simultaneous purchase of F/A-18 fighters from the U.S.

  • Thailand's acquisition of E-2 early warning aircraft, SH-60 Seahawk helicopters from the U.S. for use on a new helicopter carrier to be completed in 1997, and A-7 fighter aircraft.

    Greater Middle East. The Greater Middle East retained its position as the largest recipient of arms transfers, with about 56 percent of the value of agreements outside of the industrialized world during the 1990-1993 period. Highlights in this region since the end of the Cold War include:

  • In financial terms, Saudi Arabia has been the leading purchaser of arms in the Third World, with agreements totaling over $35 billion covering high value items such as 72 F-15 fighters contracted for in 1993.

  • Kuwait ranked second in 1993, signing agreements worth over $3 billion, including buying 256 M1A2 tanks from the U.S.

  • The number of naval combatants delivered to this area--including two submarines to Iran, and one major and 45 minor combatants to others in the region--changes the maritime situation there significantly.

    Western Hemisphere. Latin America has accounted for only 4 percent of the value of arms transfer agreements outside the industrialized world since the end of the Cold War. Russia was the region's chief supplier, with about 43 percent of deliveries. Europe was second in deliveries, and the U.S. was third, accounting for about 21 percent.

    Sub-Saharan Africa. This region has been on the receiving end of only 2 percent of the value of 1990-1993 arms transfer agreements outside the industrialized world. Russia and China together accounted for over one-half of deliveries during the period. The U.S. provided less than 6 percent.

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    International Arms Sellers Face a Buyers' Market

    Expenditures on defense equipment have dropped by more than 50 percent over the past decade in the U.S., most European countries, and Russia. Arms purchases by the rest of the world have also drifted downwards. At the same time, most industrializing countries are attempting to increase their ability to produce, and in some cases to design, their own weapons systems. This means they are adding capacity, and in many cases will be attempting to export some of their production. Thus, arms sellers are facing a buyers' market, in which purchasers can demand lower prices and greater offset.

    Russia. The most important development of the past decade in the arms transfer realm is the precipitous decline in Soviet/Russian transfers, which began in 1988-89 and bottomed out in 1992. This decline was primarily related to the collapse of the Soviet Union and the subsequent unwillingness of Russia, and other former parts of the Soviet empire, to provide military equipment to socialist regimes as a grant or at bargain prices. Barter arrangements, based on swapping military equipment for commodities priced far above prevailing world prices, also have fallen out of favor.

    The drop in Soviet/Russian shipments primarily affected developing countries such as Afghanistan, India, Iraq, Cuba, Vietnam, Angola, and Ethiopia that depended on Soviet/Russian weapons. The decline in Soviet/Russian shipments to their clients has in turn meant neighboring countries can reduce their arms purchases. However, even excluding Soviet/Russian sales, there has still been a gradual drop in the less-developed world market. This is presumably due to factors such as the shift to democratic governments in Latin America and Asia that has resulted in reduced defense budgets.

    The question of Russia's current arms relationship with Iran is a matter of some concern. Both President Clinton and Secretary of State Christopher have made clear that the U.S. is troubled by Russia's dealings with Iran, and that continuation of those dealings is incompatible with the goal of creating a multilateral regime to deal with arms and dual-use technologies.

    Concerns about political stability in Russia--particularly the specter of countless thousands of unemployed former defense workers being thrown into a civilian economy that is in turmoil--argue against the rapid downsizing of the defense industry there. Washington's decision to spend significant sums on defense conversion abroad is a reflection of this dilemma. As the President's National Security Strategy of Engagement and Enlargement report of July, 1994, asserts:

    Measures to reduce over-sized defense industrial establishments...will also contribute to stability in the post-Cold War world. The Administration will also pursue defense conversion agreements with [former Soviet Union] states, and possibly China.

    The United States. Although the value of U.S. arms transfer agreements rose in 1991-1993, U.S. deliveries have held relatively constant to both the world and to developing countries. The U.S. supplies a much wider market than was the case of the Soviet Union, and most of its major customers pay cash. About half are industrial countries, and most of the remainder are either affluent developing countries (such as Saudi Arabia, South Korea, and Taiwan) or recipients of grant aid, as in the case of Israel and Egypt.

    New agreements jumped substantially in the 1991-93 period, as Saudi Arabia and Kuwait increased purchases during and after Desert Storm, and the Bush Administration agreed to a $6 billion sale of F-16s to Taiwan. In 1993, the U.S. was the leader by far in new arms transfer agreements, signing agreements totaling some $22 billion, or about 70 percent of the world total. This jump in sales implies that actual U.S. exports will increase somewhat in the late 1990s, if the agreements are executed on schedule.

    The sharp drop in Soviet/Russian exports--combined with a gradual decline in the exports of other U.S. competitors, while U.S. shipments held constant--resulted in an increase in U.S. market share from around 20 percent to almost 50 percent at the beginning of the decade. That market share is likely to increase to the extent that the sales agreements of 1991-93 become real exports later in the decade.

    The dependence of U.S. defense firms upon foreign orders is also increasing. As recently as 1986, for example, military exports accounted for only 7.5 percent of U.S. production of military aerospace production. By 1993, the figure had doubled to 14 percent. If we look at specific systems, the numbers are even more dramatic. In FY 1995, the Pentagon will be spending around $4 billion to design new fighter aircraft (the F-18E/F and F-22), but only $1 billion to acquire them.

    Of the three fighter aircraft lines in the U.S., the F-15 and F-16 will be entirely dependent for new orders on foreign sales. Similarly, the Apache and Blackhawk helicopters, the Bradley and Abrams armored vehicles, and the Patriot missile lines are all being kept alive almost exclusively by exports. Such exports are critical if a defense infrastructure is to be kept in place to enable new systems to begin production at affordable cost on short notice. The alternative is to increase DoD purchases of equipment it does not need and cannot afford.

    Seeking export markets is only one part of U.S. industry's strategy to adapt to the shrinking defense market. Another significant trend has been to reduce the overall capacity of U.S.-based military industries. Companies have shed workers and facilities, and have sold off product lines and divisions that they could not dominate. Dramatic mergers and acquisitions, such as the marriage of Lockheed and Martin Marietta, are also taking place.

    Defense companies are also undergoing the kinds of restructuring occurring in other manufacturing sectors. Layers of management are being eliminated, and contractor/subcontractor relationships are being converted to true partnerships, instead of the traditional arm's length relationships characterized by fierce price competition.

    Europe. Both Russia and Europe are more dependent than the U.S. on foreign sales to provide work for their defense industries. Yet as domestic defense budgets decline in Europe and Russia, foreign sales by those countries are dropping as well--in contrast to the steady exports of U.S. producers. The U.S. has historically assumed that a strong European defense industry is in its interest, but this assumption needs to be re-examined in light of overcapacity in global defense industries and the effort to control global arms transfers.

    European defense companies have been undergoing similar consolidation and have essentially reached the limits of such restructuring within national borders. Yet U.S.-based companies are able to take restructuring further, so as to create relatively low-overhead institutions that are considerably larger than Europe's "national champions." Further economies of scale in the European industry will have to wait for the elimination of political obstacles to cross-border alliances among defense companies, which will take time.

    Even if such arrangements are completed, U.S.-based companies should retain a competitive edge, as full mergers of management in European partnerships are unlikely. One reason true competitive mergers are unlikely is that some of the largest European defense companies are government-owned. Instead of lean multinational companies, unwieldy cooperative projects--such as the Eurofighter, Eurofrigate, Eurocopter, and similar arrangements for a military transport aircraft and an armored personnel carrier--will continue to dominate the European approach. Such projects are modeled on the Airbus consortium, which has succeeded in grabbing market share from U.S. civilian aircraft producers, but only at a considerable cost in high overhead and government subsidies.

    Recently, European defense manufacturers have begun to recognize that they are falling behind the U.S. competition, and calls for a "buy Europe" policy are now being heard. French and German companies, in particular, are seeking protection. They have been heavily hit by the reduction in the size of the export market, the success of their U.S. competitors, and the reduction in the size of the German armed forces.

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    Surplus Equipment Plays A Major Role

    The large inventories of equipment that U.S., European, and Russian forces no longer need, and cannot afford to maintain in inventory, have had a significant impact on the current international defense market. Some of this equipment is finding its way into international markets at bargain prices. This phenomenon began as a result of the Conventional Forces in Europe (CFE) agreement, which limited major platforms for all countries west of the Urals. As a result, a cascade of older equipment from wealthier countries to poorer countries is underway. The end of the Cold War has accelerated this trend.

    The U.S. and European countries, for example, are donating or leasing capital ships to a number of countries. The Germans are putting inherited East German equipment on the market. Defense industries in arms supplier countries are concerned that the availability of such excess equipment displaces potential orders for new equipment, or at least depresses prices and decreases the bargaining leverage of sellers.

    Finally, partly as a result of Desert Storm, defense establishments increasingly realize that large weapons platforms can be used effectively only if supported by a complex network of surveillance equipment, intelligence integration, logistics networks, and communications, command, and control. Therefore, a growing share of acquisition budgets is likely to be dedicated to such equipment.

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    Controls Are Difficult To Establish

    Obviously, the U.S. would like to limit the ability of aggressive countries to obtain weapons, particularly if U.S. forces might one day have to deal with those countries. This is all the more important in today's world, where the U.S. will increasingly find itself called upon to act as world policeman, or at least referee. But such a policy is easier to enunciate than to carry out in practice.

    Clearly, the problem is not simply one of keeping cutting-edge U.S. weapons systems from unpleasant regimes. While being shot at by one's own weapons is politically embarrassing, this has not really been a major problem to date. Given that the U.S. has been a major supplier of weapons to many countries since the late 1930s, the fact that U.S. forces have rarely faced weapons produced or designed in the U.S. demonstrates that this country has been cautious in supplying such weapons. However, it is not particularly relevant to a U.S. soldier whether the weapons used against him are of U.S. or foreign origin. In recent years, the USS Stark was nearly sunk by a French Exocet missile fired from a Russian MiG; the worst casualties in Desert Storm resulted from a hit on a barracks by a Russian-designed SCUD missile; and the helicopter downed in Somalia was almost certainly hit by a Russian rocket propelled grenade.

    However, some academic observers have suggested that the emerging dominance of U.S.-based arms production and technology is so strong that the U.S. government need not worry about conventional arms control efforts. Economic forces alone, according to this school, will cause other producers to drop out, leaving the U.S. in a position to dominate trade in state-of-the-art military equipment, and thus boosting Washington's ability to manage the conventional arms trade.

    There are several problems with this theory. First, some arms production capability is beyond the reach of purely market forces, as in the case of Chinese producers. Second, some of the most important items used in modern warfighting systems are dual-use equipments that are widely available through international commercial markets. Third, the danger exists that other governments may perceive such quasi-monopoly power as a threat to their interests and respond in some dangerous fashion--for example, by turning their attention to the development of weapons of mass destruction. Finally, the unfortunate reality is that too many conventional weapons are already available to allow easy management of arms transfers at any time in the foreseeable future.

    Attention in the arms transfer debate has generally focused on the transfer of major weapons platforms and the weapons they carry. Aggregate values for weapons agreements or sales, such as those included in this chapter, are certainly skewed toward such equipment, as such platforms account for the largest dollar figures involved in arms transfers. However, it should be recognized that, at least since the Vietnam War, such large platforms have caused few U.S. casualties.

    The most consistent danger to U.S. forces in recent years--particularly during interventions in failed states--has arisen from portable weapons such as automatic rifles, mines, rocket propelled grenades, and shoulder-fired anti-tank and anti-aircraft weapons. For example, the chances of a U.S. soldier being killed by Iraqi tanks, artillery, and missiles during Desert Storm were many times smaller than his chances of being killed in Somalia, where the largest weapons platforms were pickup trucks with recoilless rifles welded onto the bed.

    Such weapons are furnished by at least thirty to forty countries. Furthermore, they are handled by many independent arms dealers, and there are enormous stocks of surplus small arms around the world. Consequently, estimates about the production, transfer, and possession of such weapons are usually so much guesswork.


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