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The International Political Economy of Defence Corporations. Between National Interests and Globalising Forces. By Alma Gonzalez 7 October 2008. Outline. 1. Introduction: Defence is Different. 2. The Political Economy of Defence.
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The International Political Economy of Defence Corporations Between National Interests and Globalising Forces By Alma Gonzalez 7 October 2008
Outline 1. Introduction: Defence is Different. 2. The Political Economy of Defence. 3. From the Past to the Present: The Evolution of the International Defence Industrial System. 4. The Globalisation of the Defence Industry: A conflict of Interests Between States and Markets. 5. The US Defence Industrial Base: Adapting to New Strategic and Market Conditions. 6. Western Europe and the Defence Industry: National Interests and Regional Challenges. 7. Conclusions.
Defence corporations are Westphalian constructions: all states have the protection of national sovereignty as their ultimate goal. The strategic importance of defence firms to national security justifies the role of the government in stimulating and protecting military production. The fact that the armed forces exist to fulfill national security requirements explains the traditional reluctance of even the most liberal states to treat arms as any other commodity. Why politics can matter more than economics…
“Defence is a public good whose provision demands the active participation of the State.” – Adam Smith
As evidence: 1) Defence production and trade are exempt from WTO rules. Article XXI of the GATT states that any government can take the actions that: “it considers necessary for the protection of its essential security interests...relating to the traffic in arms, ammunition, and implements of war and such traffic in other goods and materials as is carried out directly for the purpose of supplying a military establishment (or) taken in time of war or other emergency in international relations.”
2) At the European Union level, article 296 of the Treaty of Amsterdam excludes the defence sector from the single market: “any Member State may take such measures as it considers necessary for the protection of the essential interests of its security which are connected with the production of or trade in arms, munitions and war material; such measures shall not adversely affect the conditions of competition in the common market regarding products which are not intended for specifically military purposes.”
3) At the international level, article 51 of the Charter of the United Nations grants states the right to defend their national sovereignty by means of military force: “Nothing in the present Charter shall impair the inherent right of individual or collective self-defence if an armed attack occurs against a Member of the United Nations.”
2. The Political Economy of Defence • A political economy framework offers the wide scope necessary to tackle the interplay of the economic and political forces that determine the functioning of defence corporations. • The Liberal Approach: The virtues of market competition. • The Realist Approach: Market failure in the defence economy.
State’s foreign economic and political policies National economic and political objectives Defence industrial ambitions International political and economic system Political and economic viability of international collaboration in defence production and trade National defence industrial policies An IPE Model for Defence Corporations Dynamics of defence corporations
3. From the Past to the Present: The Evolution of the International Defence Industrial System • First nation states 15th century: Autarky in the production of arms is unviable. Economic considerations are stronger than political concerns. • Spread of industrialisation in the 18th century. By the late 19th century: the expanded output of firms that were free to trade in international markets considerably reduced the costs of national defence procurement. Economics continue prevailing over politics.
Cold War Scenario: 1) Partial or full control of defence production capacities by the state was deemed vital to stay ahead of rival countries. 2) Large budgets were allocated to defence: USSR: 17% GDP. USA: 7% GDP. Western Europe: 5% GDP. 3) Domestic arms production was strongly encouraged by the state. 4) Arms exports were strictly controlled and collaboration in arms production was limited to allies. 5) Developing countries devoted considerable amounts of financial resources to the development of military capacities.
Post Cold War Scenario: 1) Western societies demanded the payment of the ‘peace dividend.’ Defence expenditures were drastically cut. 2) Emergence of new technologies that increase the costs of weapons (Rapid evolution of military technology since the 1991 Gulf War). 3) Defence economics problem: rising equipment costs and falling defence budgets. 4) The transformation of the military and geopolitical environments brought back the economic rationality trend that had been interrupted by the Cold War. US National Defense Expenditure as a Percentage of GDP, 1962-2007. Source: The Heritage Foundation. 2008 Federal Revenue and Spending Book of Charts.
Some Key Figures: In 2007, the 76 countries that account for the majority of global defence expenditure spent US$ 1.3 trillion. Every year approximately 30% is spent on military procurement. Source: Jane’s Defence Weekly, Vol. 1, Issue 1, Jul 2008.
Global Military Expenditure (2007) Source: Jane’s Defence Weekly, Vol. 1, Issue 1, Jul 2008.
Fundamental Problems: For States: How to satisfy the need for national security equipment in a competitive global economy? (Autarky – Efficiency Dilemma) For Corporations: How to overcome the problem of rising production costs and limited markets? (Defence Economics Problem)
4. The Globalisation of the Defence Industry Defence Globalisation: “The shift away from traditional, single-country patterns of weapons manufacturing in favour of "internationalizing" the development, production, and marketing of arms" (Bitzinger, 1999).
Characteristics of Defence Globalisation • Transnationalisation of design, development, and production weaponry through a variety of collaboration arrangements. • Production systems structured on a global scale: factor endowments and access to new markets. • Decisions regarding investments and relocations made on the basis of market access and industry efficiency.
The Major Primes Source: Stockholm International Peace Research Institute, 2007.
Source: Stockholm International Peace Research Institute, 2007, 2008.
5. The US Defence Industry US Defence Budget 1945 - 2006 (constant 2000 dollars). • From the middle 1980s to the late 1990s the US defence expenditure fell by 25%. Procurement expenditures went from $130 billion to $40 billion. • How did the industry survive? Source: US Office of Management and Budget, 2006.
STRATEGIES: To tackle the problem of excess capacity: consolidation (M & A) driven by the state in the 1990s. Number of prime defence contractors: from 33 in 1990 to 5 in 2000. US National Champions: Lockheed Martin, Boeing, Raytheon, Northrop Grumman, General Dynamics. In 1998, the US Department of Justice rejected the merger of Lockheed Martin and Northrop Grumman. High federal investment in defence R&D (30% of the defence budget). Dual-use policies: collaboration between civil and military producers. Protectionist policies (e.g. Buy American legislation). CONSEQUENCES: As of 2007, the US has an arms trade balance of $29,852 million. Arms exports amount to $32,128 million only. A consolidated domestic market dominated by super primes. Concerns about the protection of critical technologies remain. Domestic politics play a crucial role in shaping defence industrial strategies. Defence exports are supported on political grounds (e.g. equipment interoperability of coalition forces). Protectionist policies generate similar responses from major trade partners. Source: Stockholm International Peace Research Institute, 2007. Adapting to New Strategic and Market Conditions
US current scenario and challenges • Since 2001, defence spending has been increased by 40%. • New threats (i.e. international terrorism, regional conflicts, and rogue states) require the constant modernisation of the military. • The incorporation of advanced technologies is inevitable and rises production costs. • The US defence industry is in the vanguard of defence transformation, but the transnationalisation of the production process is needed to share risks and costs with foreign partners.
6. Western Europe and the Defence Industry • From the middle 1980s to the late 1990s the defence budget of Western Europe was cut from $204 to $168 billion. • EDTIB fragmented in small national uncompetitive markets. • Can European firms follow the same consolidation strategy as the US?
STRATEGIES: Rather than consolidation, collaboration has been the preferred regional strategy. Strategic alliances, joint ventures, and collaborative production programmes. Integration of production has been hindered by national interests and the lack of a regulatory framework. Collaboration projects are usually driven by political rather than economic considerations (e.g. principle of just retour). In the 2000s, major restructuring took place and produced 5 large corporations: EADS (Germany, France, Spain), BAE Systems, Thales Group, Augusta Westland, MBDA. In 2004, EDA was created to promote armaments co-operation and facilitate the creation of a competitive defence market. National Interests and Regional Challenges
Example of Co-production in Europe • The components of the A400M military transport aircraft are currently being built by the Airbus consortium in six different countries: Belgium (flaps), Britain (flaps and outer wing box), France (nose fuselage, rudder), Germany (fuselage), Spain (tail) and Turkey (ailerons and spoilers).
OBSTACLES: National states hold in high esteem the concept of national sovereignty. Unlike the US, Europe does not perceive an immediate threat to national security. Lack of a homogenous strategic vision and political incentives (e.g. absence of consensus on the implementation of the EDSP). Defence budgets are perceived as a financial burden difficult to justify in political and economic terms. CONSEQUENCES: Lack of political will to integrate the defence market. Divergent procurement policies among member states. Restrictions on technology transfers at the European and transatlantic level. Weak technological and industrial position vis-à-vis the US. Governments interfere on the basis of protection of strategic sectors with a direct impact on national security. National governments maintain local defence industrial bases at the expense of European competitiveness.
EU current scenario and challenges • EDTIB produces 80% of weapons produced by European states. • EDTIB is configured by national policies and interests. • Government interference favours the strengthening of national defence industrial capacities and not Europe’s as a whole. • Forecasts suggest that by 2011 total defence expenditure of the EU will be under $300 billion. • Despite increased collaboration and consolidation, European competitiveness is hindered by the lack of consolidation in the demand side.
7. Conclusions • Politics interfere with the efficient management of economic resources: the fundamental problem is how to reconcile legitimate national interests with economic imperatives. • At the strategic level, different security priorities lead to different military requirements which result in political obstacles for collaboration. • The US is the only country that can possibly finance politics predominance over economics (self-sufficiency). However, technological innovations make it increasingly difficult. • Unless the political environment creates incentives to liberalise the defence market and legislate intra-European and transatlantic collaboration, US and European defence corporations are likely to evolve on two different tracks to the detriment of the latter.
