Procurement: Domination

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August 4, 2018: While global defense spending has been basically static since 2011, stuck between $1.7 trillion and $1.8 trillion a year. Spending has been changing dramatically because what is being spent by nations in some regions. You can see this by the fact that arms exports rose sharply going from nearly $70 billion a year in 2010 to about $100 billion a year now. There have also been changes in who is exporting what.

For the last five years (2013-17) the top exporters were the United States (34 percent of total arms exports), Russia (22 percent), France (6.7 percent), Germany (5.8 percent), China (5.7 percent), Britain (4.8 percent), Spain (2.9 percent), Israel (2.9 percent), Italy, (2.5 percent) and Netherlands (2.1 percent). Not surprisingly a small number of nations dominate the arms trade. The U.S. and Russia account for 56 percent of exports, the same share as the previous period (2008-12). One difference in that in the most current five years the U.S. share rose from 30 to 34 percent and Russia declined from 26 to 20 percent. The U.S. has long been dominant in arms exports because American stuff was considered the best (most effective and reliable), usually combat proven and backed by decades of excellent maintenance, upgrade and training support. The main competitor for the Americans was not Russia but other Western nations.

Consider that taken together West European nations accounted for 27 percent of exports. Western gear is the most expensive and if you are facing a formidable opponent it is worth it. Russian and Chinese gear is often adequate for potential opponents many nations face, as well as those countries that mainly face internal opposition. Defense exports are best expressed as five-year averages because while national defense budgets don’t vary a lot from year to year, export sales do. For example, French arms exports fell by 50 percent from 2016 to 2017. Annual increases are often of the same magnitude. These sharp ups and downs have much to do with the size of orders for aircraft and ships or, these days, smart bombs. The five-year averages smooth that out and give a better idea of who is doing what.

What it comes down to is the United States, Russia and Western Europe account for nearly 84 percent of all arms exports. While China is increasing its share of arms exports (from 4.6 percent in 2008-12 to 5.7 percent in 2013-17) that growth tends to be at the expense of Russia for nations that do not, or cannot afford best or are outlaw buyers who are under arms import embargoes or are not nations at all (black marker dealers). China and Russia are also not bothered by the need for bribes and other shady terms of sale.

Another factor to consider is that most of the arms exports go to Persian Gulf oil states, India and other Western nations with large defense budgets. Much of these sales are aircraft and associated equipment (weapons, like smart bombs and missiles as well as electron accessories and upgrades) and anti-aircraft and anti-missile systems. West Europe is the main exporter of non-nuclear submarines, small to medium size warships and patrol boats as well as a lot of warplanes (fighters, helicopters and transports). Western nations sell a disproportionate amount of military services (training, maintenance, upgrades) even to nations using Russian and Chinese weapons.

Outside of the U.S., Europe and China, the only new major supplier is South Korea (which went from .8 percent to 1.2 percent of exports in the last decade). Japan could be a major player (as they are planning to do) once they change their post-World War II constitution to allow for arms exports. Japan is already a major producer of modern weapons, but only for its own use.

The growing arms exports are driven by increased defense spending in some regions. Until the last few years there continued to be cuts in the West (especially the Americas and Europe). That began to change after 2014 as Russia and China became more aggressive. Actually, if you exclude the United States, defense spending went up every year since 2011. That’s because there’s an arms race going on in the Persian Gulf and East Asia even as the Americans scaled back their spending for a few years. One side effect of this is the emergence of Saudi Arabia as the third highest spender (after the U.S. and Chia) in 2016, displacing Russia. Ironically both Russia and Saudi Arabia depend heavily on oil exports to maintain defense spending. Despite the sharp (more than 50 percent at one point) drop in oil prices since 2013, the Saudis were better able to continue their high spending while Russia was forced to cut back. The Saudis are feeling the fiscal pressure from lower oil prices and will soon have to make cuts. Russia has other problems, like international sanctions because of threats to neighbors. This has crippled the Russian economy, which was already in trouble because of corruption and foreigners reluctant to do business with them.

A lot of that spending in the wealthier “developing” nations like Saudi Arabia is for modern weapons they cannot produce themselves. Since 2008 deliveries of such weapons to these nations have averaged about $48 billion a year and most of this has gone to the oil-rich Arab states buying the latest and most expensive military tech in an effort to deal with increasing aggressiveness by Iran. While the United States and China produce nearly all their own weapons Saudi Arabia imports nearly all of its weapons, mostly from the U.S. and Europe. Thus Saudi Arabia accounts for about two-thirds of the annual foreign weapons imports for developing nations.

In the last decade, the United States had cut spending about four percent (to the $595 billion) before reversing that recently China’s spending more than doubled (to the current $220 billion). Russian spending nearly doubled (to $66 billion) after dropping sharply in the 1990s and rebounding slowly and then declining again after 2014 (because of sanctions and low oil prices). In the meantime, Saudi Arabia moved past Russia and is now spending $87 billion a year. India is spending more each year and at its current $54 billion has passed France ($51 billion) and is about to surpass Britain ($55 billion.) After more than a decade of cuts, European spending went up over one percent in 2015, mainly because East European nations are spending a lot more to deal with a growing threat from Russia. Even Germany is now increasing spending to deal with the Russian threat.

A major factor in the relatively static global spending was that by 2010 a decade of heavy defense spending, to replace a lot of the elderly Cold War era equipment was largely completed. Also ending, especially for the United States, was an expensive war on terror operations in Iraq and Afghanistan. The U.S. military, especially the army and marines, used the demand for new weapons and equipment in Iraq and Afghanistan as an opportunity to replace a lot of aging Cold War gear. The air force and navy did not do as well and now, with American defense spending largely static, there will be fewer American warplanes and warships because the money and popular support for replacing a lot of the Cold War era warships and aircraft is not there. That trend may be reversed because of the growing Chinese threat.

Most Western nations deliberately shrank their armed forces after the Cold War ended in 1991. This included China and Russia, although both of these nations are still buying a lot of modern gear. Russia does it now because it was too broke in the 1990s to buy much and the Chinese because they didn’t have a modern force at the end of the Cold War and are determined to take the lead in this area. Since 2014 a growing number of European have started increasing defense spending to deal with the Russian threats while Russia maintained defense spending for a few years to complete the program to replace the aging Cold War era weapons and equipment. This is all about basic economics. The Russian economy is in decline while China continues to grow.

Since September 11, 2001, global defense spending increased nearly 50 percent and is now about 2.5 percent of global GDP. After the Cold War ended in 1991, defense spending declined for a few years to under a trillion dollars a year. But by the end of the 1990s, it was on the rise again. The region with the greatest growth has been the Middle East, where spending has increased over 60 percent in the last decade. The region with the lowest growth (six percent) was Western Europe. Five years of worldwide recession and the decline in spending by most Western nations has helped stall global defense spending at $1.7-1.8 trillion a year. Western defense firms are feeling this the most, as their sales have been flat from 2011 to 2014 but are now picking up.

 


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