Arms Sales And The U.S. Economy

The Impact Of Restricting Military Exports

William D. Bajusz

• Publisher: Taylor & Francis
• Year: 2019
• eBook ISBN: 9780429713200
• Edition: 1
• Topic: Politics & International Relations
• Subtopic: Political Economy
• Index: Politics & International Relations

This book addresses the U.S. economic impact of possible restrictions that might be placed on the sale of specific combat equipment to selected countries in the Middle East. It focuses on prospective demand for advanced equipment by Jordan and the member states of the Gulf Cooperation Council.

1
Introduction

The purpose of this study is to contribute to, and hopefully further, national discussions of the implications of future U.S. sales of military equipment overseas for the U.S. economy. Specifically, this study addresses the domestic economic impact of possible restrictions that might be placed on the sale of specific combat equipment to selected countries in the Middle East. In so doing, this book focuses upon prospective demand for advanced equipment through the year 2000 by Jordan and the member states of the Gulf Cooperation Council (GCC). The members of the GCC include: Saudi Arabia, the United Arab Emirates, Bahrain, Kuwait, Oman and Qatar.

Few would dispute that overseas sales of military equipment and support services have positive benefits for the U.S. economy. Conversely, few would question that a decision by either the Executive or Legislative branch of the U.S. Government to forego such sales entails some economic costs. What is not well understood, or is frequently at issue in particular arms transfer cases, is exactly how economically beneficial such sales are or how punitive foregoing particular sales may be for the U.S. Advocates of particular sales have been known to cite statistics suggesting that significant economic damage will attend a failure by the U.S. to transfer arms. Likewise, critics of sales, or proponents of arms transfer restraint more generally, have often appealed to evidence suggesting that the national economic costs of limiting arms transfers are marginal.¹

Underlying such debate is a lack of any consensus upon a methodology by which the benefits or costs to the U.S. economy of particular sales can be estimated with any confidence. This absence of consensus stems not so much from the presence of conflicting methodologies, approaches, and assumptions as from the dearth of any systematic attention to the development of a rigorous way of calculating economic impacts, especially for prospective sales of military equipment. A notable exception in this regard is a Congressional Budget Office (CBO) study in 1976 which addressed the impact of the Foreign Military Sales (FMS) program on the U.S. economy using macro economic models.² Specifically intended to address the implications of a hypothetical U.S. arms transfer restraint policy, this study concluded that across-the-board restraints in FMS agreements (assuming deliveries associated with existing commitments were honored) would, by 1981, cost the U.S. about $20 billion in GNP terms and around 350,000 jobs (or 0.3 percent higher unemployment than otherwise would have been the case). The extent to which the general conclusions of this study are valid more than ten years later under changed economic circumstances and whether the approach taken in the CBO study accurately portrays the full economic impacts of arms sales are matters for empirical inquiry.

Where this study can hope to make a contribution is perhaps not so much in its conclusions, but rather in presenting a structured, rigorous methodology for measuring economic impact associated with any future military sale. To be sure, this book offers some conclusions on the likely implications of a policy of limiting future sales of selected military equipment to Jordan and the GCC. At the same time, these conclusions are tentative because they are shaped profoundly by available data and the assumptions clearly set forth in subsequent pages. What may be more important than the conclusions per se is the approach taken to derive the conclusions. The methodology described in succeeding paragraphs hopefully will provide a basis for discussion by individuals representing a broad national political and professional cross section.

Such a broadly based discussion would appear to be particularly timely as national reservations increase about the overall U.S. world trade position. Domestic economic considerations traditionally have not figured prominently (if at all) in deliberations over specific arms transfers, which instead have been shaped principally by foreign policy considerations. The record of Congressional intervention in sales to Jordan and Saudi Arabia (about which more is said below) is illustrative in this regard. This study does not proceed from the premise, nor does it imply, that economic considerations should be the sole or even predominant determinants of whether to transfer military equipment. Rather, this study has been crafted in the belief that it is impudent to ignore totally economic considerations in such matters and all the more so in a climate in which there is intensifying concern over U.S. trade imbalances, their implications for the U.S. economy, and global competitiveness.

More generally, this study also may have methodological relevance for consideration of other trade issues in which there is concern about the domestic economic impact of particular policy decisions. Notably, a recent National Academy of Sciences (NAS) study of technology export controls and global competitiveness called attention to economic consequences of self restraint.³ Specifically, the NAS study argues that "A reasonable estimate of direct, short-run economic costs to the U.S. economy associated with U.S. export controls in 1985 was on the order of $9.3 billion."⁴ Further, such controls are judged by the NAS analysis to cost the U.S. about 188,000 jobs per year. On the other hand, critics of the NAS effort have judged its methodological underpinnings harshly.⁵ Similarly, consideration of the growing trend toward offset and countertrade arrangements for defense equipment and other goods is beset with disputes over estimating the economic costs to the U.S. of entering into such arrangements.⁶

In this study the economic implications of prospective arms sales are assessed at a level of detail that heretofore frequently has not been possible principally because a number of individuals within Government and private industry were willing to participate. They did so on the grounds that they not be explicitly identified and their wishes have been honored. Further, the study benefitted enormously from the sponsorship of General Dynamics, which was willing to fund part of the research and also to provide the services of specialists in operations research and overseas sales.

Among some observers, the participation of industry in a study such as this is likely to provoke skepticism about both approach and results — after all, those who manufacture arms for export have a vested interest in the outcome of a study such as this. However, both prudence and the precepts of empirical inquiry seemingly would dictate that this book be carefully and critically examined in terms of approach and results. Moreover, this study should not only be challenged, but replicated using different data sources, assumptions, and analytic tools. Progress toward understanding the true economic implications of arms sales for the U.S. is likely to be made only via a critical and open debate.

This book fills a void with respect to measuring the economic implications of curtailing U.S. arms sales. While it is intuitively clear to most observers that any U.S. decision to limit the sale of military equipment overseas results in some negative implications for the U.S. economy, the extent to which there are negative economic ramifications has heretofore received little, if any, systematic analytic attention. Certainly this has been true in deliberations on prospective sales. The development of tools to inform policy making simply has not kept pace with the actual decision making (such as in the recent instances of the Jordanian and Saudi arms packages).

The analysis explicitly recognizes the uncertain durability and scope of potential U.S. restrictions on sales to the Middle East by examining the economic implications of curtailing sales at different levels: (a) combat aircraft sales to Jordan and Saudi Arabia; (b) combat aircraft sales to Jordan and the entire GCC; (c) selected military equipment (combat aircraft, main battle tanks, and naval fast attack craft and the weaponry for each) to Jordan and Saudi Arabia; and (d) selected military equipment to Jordan and the entire GCC. Considering these four different conditions of restraint provides a reasonable way to bound the economic impacts associated with possible limitations on future U.S. sales to the Middle East. Nonetheless, it is admittedly arbitrary. A policy of limiting arms sales could take a variety of different forms in the future (e.g., limiting only combat aircraft and man-portable air defense systems to Jordan). The methodology used in this study lends itself to assessing the economic impacts of whatever form restraint might assume. Accordingly, while some observers may have different views on the contours of future restrictions, they nonetheless should find the approach taken in this study to be useful in drawing their own conclusions regarding the economic implications for the U.S.

Central to a credible measurement of economic impact is the recognition that assessing prospective military demand — in the Middle East or anywhere else — is not susceptible to a single analytic approach on which everyone can agree. Accordingly, three alternative ways to assess future demand for specific equipment are employed in this study: (1) an approach based upon each nation's military need to replace its existing inventory because of obsolescence; (2) one reflecting not only inventory obsolescence, but also the requirements of the military establishment and the financial ability of the nation to acquire particular weapons; and (3) a straightforward extrapolation of prior national trends in military purchases. Each method is based on a somewhat different set of assumptions and thus (and not surprisingly) each provides a different estimate of likely military demand.

The direct income losses associated with restraint using available cost estimates for specific items of equipment are assessed in the following chapters. Direct income includes all funds paid for particular products and support services to the prime contractor, associate contractors, and sub-tiered suppliers. The specific items of equipment are: the F-15, F-16, and F-18 combat aircraft; the M-l main battle tank; and the Al Siddiq class fast attack craft.

Direct income is associated with direct employment and further has a multiplier effect on the surrounding community in terms of both indirect income and employment. Within any given community, the employees directly responsible for executing the respective FMS program spend some portion of their salaries for services such as housing, clothing, and food in the local area. Indirect income and employment impacts, both direct and indirect, are assessed using algorithms that reflect both prior research and empirical data.

As demonstrated in the remaining volume the value of prospective demand for advanced combat aircraft, tanks, naval fast attack craft, and the weaponry for each by Jordan and the GCC states, taken together, varies between around $17 and $31 billion (in constant 1986 dollars) through the end of this century.¹ This estimate reflects only the direct income associated with Middle East demand. The bulk of this market is accounted for by Jordanian and Saudi military demand. Further, combat aircraft are a major, if not the major, fraction of the potential market for the U.S.

In estimating the economic costs of forbearance in meeting potential Middle East demand in coming years, every effort is made to acknowledge and take into account serious uncertainties. In so doing, this study errs on the side of conservatism, thereby avoiding any dramatic overstatement of economic impacts. If future restrictions are limited only to U.S. sales of combat aircraft to Jordan and Saudi Arabia, the total income loss — that is, direct and indirect income combined — to the U.S. likely will vary between $8.54-$ 18.27 billion. The corresponding impact in total employment terms is 270,000-571,000 man years.** If such restrictions are expanded to encompass the other GCC states as well, then economic costs rise correspondingly: to as much as $28.36 billion in total income and 886,000 man years in total employment. Alternatively, if restrictions are limited to Jordan and Saudi Arabia, but encompass tanks and naval fast attack craft as well as combat aircraft, then total income foregone may be between $22.26 billion and $33.99 billion and employment lost may vary between 686,000 and 1,062,000 man years. The most restrictive case examined in this study is one in which the sale of all selected equipment items is prohibited to Jordan and the entire GCC. Under these circumstances, the total income lost to the U.S. economy could be as high as $60.07 billion. The corresponding figure for total employment might rise to 1,878,000 man years.

Clearly, the foregoing are not the only economic impacts likely to be felt within the U.S. For one thing, income foregone translates into tax revenue foregone. Marginal tax multipliers are notoriously difficult to substantiate. Nevertheless, if the marginal tax multiplier is .25, then under the least restrictive assumptions in this study, total federal tax revenues lost would be about S2.14-S4.57 billion. Under the most restrictive assumptions, lost federal tax revenues could be as high as $15.02 billion.

For another, and as illustrated in some detail in this study, there are a number of benefits that accrue to the U.S. from overseas sales in terms of development cost recoupment and production cost savings on U.S. military service purchases of the same weapon system, other types of revenues, and additional add-on costs. A preliminary study such as this is unable to measure these benefits accurately for all types of systems given data and methodological limitations. Nonetheless, this study is able to estimate these foregone benefits for a particular industry — aerospace. Further, it refines estimates of particular costs for a particular example of restraint: past and prospective Jordanian interest in the F-16 combat aircraft.

How significant the results of this analysis are in economic terms is a matter of interpretation. "Significance" is after all in the eye of the beholder. On one hand, despite the overall magnitude of the total economic impacts, their distribution geographically within the United States and over time may diminish the economic significance of such losses in the eyes of many observers. With respect to the distribution over time, it is clear that the economic losses will not be distributed simply over the fourteen year timeframe of this study. Some of the modernization decisions that are likely to be made by Jordan and the GCC states will not occur until the late 1990s, and equipment deliveries and support services are likely to stretch well beyond the year 2000.

On the other hand, despite the geographic and temporal distribution of the economic implications outlined in this study, one could interpret them as significant nonetheless. Not only might they be judged significant in their own right, but perhaps all the more so when seen within the broader context of other economic trends adversely affecting particular U.S. defense industries and the overall U.S. global economic position.

Whatever the significance ascribed to the substantive findings of this work, the more important contribution may be that it offers a systematic method, which heretofore has not been evident, for assessing the economic costs of curtailing future arms sales. This method is applicable, with appropriate modifications, to any other region or country in the world as well as to the Middle East.

Certainly the research conducted and the analytical methods used for projecting future demand and for assessing future economic impact are not without limitations and consequently this book cannot and should not be regarded as definitive. Much additional work needs to be done. Both prudence and the precepts of empirical inquiry would seemingly dictate that this study be carefully and critically examined in terms of both approach and results. Moreover, the research contained here should not only be challenged but replicated using different data sources, assumptions, and analytic tools. Progress toward understanding the true economic implications of arms exports specifically and high technology exports generally, for the U.S. are likely to be made only through a critical and open debate.

¹ All dollar figures presented are in constant 1986 dollars unless otherwise noted.

**The range of estimates is based on the range of possible demand stemming from different approaches to assessing demand.

Notes

1. Andrew J. Pierre, The Global Politics of Arms Sales (Princeton: Princeton University Press, 1982), pp. 68-69.

2. U.S., Congress, Congressional Budget Office, The Effect of Foreign Military Sales on the U.S. Economy (Washington, D.C.: July 23, 1976).

3. See "NAS Report Brims with Ammunition for Foes to Blast DoD on Export Controls," Defense News. January 19, 1987, p. 10.

4. Ibid.

5. See the comments by Assistant Secretary of Defense Richar...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Contents
• List of Tables and Figures
• Preface and Acknowledgments
• 1 INTRODUCTION
• 2 THE BROADER CONTEXT: THE INTERNATIONAL MARKET FOR MILITARY EQUIPMENT AND SERVICES
• 3 THE BROADER CONTEXT: THE DOMESTIC ECONOMIC IMPLICATIONS OF THE FMS PROGRAM
• 4 EMERGING U.S. RESTRAINT
• 5 PROSPECTIVE DEMAND FOR ADVANCED WEAPONRY IN THE MIDDLE EAST
• 6 THE ECONOMIC IMPACT OF RESTRAINT IN PROSPECTIVE MILITARY SALES TO THE MIDDLE EAST
• 7 CONCLUSIONS: RESTRAINT AND ITS ECONOMIC IMPLICATIONS
• APPENDIX: REGIONAL DEFINITIONS
• ABOUT THE AUTHORS
• INDEX