America's Arms-Trade Monopoly

Ethan B. Kapstein

From Foreign Affairs, May/June 1994

Article preview: first 500 of 3,167 words total.

Summary:  Soaring production costs and sinking defense budgets are killing off competing arms-makers. America must use its arms monopoly for the good of global security.

Ethan B. Kapstein is Co-Director of the Economics and National Security Program at Harvard University's John M. Olin Institute for Strategic Studies.

AMERICA'S ARMS TRADE MONOPOLY

For the first time in modern history, one country is on the verge of monopolizing the international arms trade. Rising costs and declining defense budgets are putting pressure on the world's inefficient defense producers, and most of them are collapsing under the strain. Soon the worldwide armaments industry will be nearly unrecognizable. By the early 21st century, the United States will be the sole producer of the world's most advanced conventional weaponry, as other countries discover, like the Soviets did, that the costs associated with financing new defense programs are too heavy to manage.

If exploited properly, this monopoly will benefit not only the United States but international security as well. The past proves that countries that rely on American arms are less likely to start wars with their neighbors. Ironically, a U.S. monopoly would also be good for the world economy. With inefficient defense firms put out of their costly misery, governments will be able to put scarce resources to more productive pursuits.

Accordingly, the United States should welcome the coming era. Owing to the benefits that will flow from its monopoly position, the United States need not encourage multilateral efforts to create a cartel of arms suppliers or encourage other great powers to remain in the weapons game. Indeed, past U.S. policies that transferred advanced weapon technology to allies should be stopped, and the United States henceforth should export only finished weapons.

But monopoly power has dangers as well. Monopolists who use their power coercively drive consumers to seek alternatives and, in the case of military technology, this will likely mean a scramble by many countries to develop weapons of mass destruction. Further, monopolists tend to grow lazy and invest little in innovation, leaving themselves vulnerable to new technologies that erode their positions. In sum, America's arms trade monopoly gives it tremendous opportunities to shape the international economic and security environments, but prudence will dictate restraint in the exercise of that power.

WATCHING THE DEFENSE BUDGETS

In order to understand the inexorable forces that are working on the world's defense industries, one must first examine their economic environment. The most important number for any firm is the defense budget of the nation in which it is based, since in most cases the government remains the single largest buyer of domestically produced weaponry. Throughout the Western alliance, defense budgets have been falling for several years, and the downward plunge will continue for several more. In the United States, defense spending fell by 13 percent between 1986 and 1991, and the projected defense budget in 1997 will be almost 40 percent smaller in real terms than it was in 1985. Similar if smaller cuts are underway in Britain and Germany. Among the Western allies, only France and Japan have been trying to maintain the size of their defense budgets in real terms.

Even after these cuts, the U.S. defense market will continue to be much bigger than the markets of all its allies combined. In ...

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