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September 18, 2011 |  Print  Your Opinion  

Open Markets, Better Arms

Dmitri A Titoff: Without an agreement on a common defense policy, European states are letting market forces play a larger role in shaping their defense industries. Open markets could increase the risk of proliferation, but would also lower arms prices and improve military procurement across European borders.

Defense budget cuts are forcing European arms manufacturers to look to foreign markets for sales. In France and Germany, governments and industry appear to share an appreciation for the need to relax export controls somewhat. Germany already emerged as the world's third biggest arms exporter in 2006-2010 (10.6%), behind only the United States (30.3) and Russia (22.9). Its major recent deals included the sale of 200 tanks to Saudi Arabia and submarines to Israel. France has tapped the Russian market with the sale of Mistral-class amphibious assault ships. European jets, meanwhile, are competing for major Indian and Brazilian fighter contracts. Without a common enemy Europeans cannot agree on common defense agenda, and hence appear to be inclined to let commercial interests play a greater role in shaping their defense industries, including what and where firms can export.

In the heyday of the interstate arms trade in the late 19th and early 20th centuries, European arms manufacturers relied heavily on exports because, like today, home governments did not offer large enough markets. Governments enthusiastically promoted arms exports, realizing domestic technical advantage could be sustained through foreign sales, the proceeds from which would be reinvested in research and development of better arms. For example, in 1898 French manufacturer Schneider et Cie exported about 60 percent of its products abroad, and Austria-Hungary’s Skoda relied on foreign markets almost completely after failing to secure state orders. Germany’s Krupp exported about half of its production abroad, to some 52 countries. Much weaponry went to hot areas like the Balkans, Russia and the Ottoman Empire.

During the Cold War, exports helped sustain defense autonomy, for example in France, where it became a national policy during Charles De Gaulle's presidency. The French, on average, have exported about 30 percent of the armaments they have produced. In the 1990s, however, the collapse of defense budgets made complete autonomy unsustainable, compelling Europeans to consolidate aerospace and electronics assets across national lines (e.g. EADS, BAE, Thales), chiefly to stay competitive with many US firms who had merged. Unlike large multinationals, however, most medium-sized firms, suppliers and producers of land and naval equipment are still almost exclusively responsive to national procurement schedules and export opportunities. Overall, 75 percent of defense goods in Europe are currently procured within national boundaries. This inefficient allocation of resources is primarily due to restrictions on small markets, budgetary pressures and a lack of significant security threats to EU members.

So governments have two ways to proceed. One is to promote arms exports, which states like France and Germany are doing; and the other, on the community level, is to make the internal European defense market more open.

The EU Commission has made notable movement in this direction recently, to break the state protectionism of home defense industries by enhancing inter-community competition for state armament orders and by cutting red tape to ease the movement of defense products (EC Directives 2009/81 and 2009/43). In the long term, this should enable competition among EU defense firms, reduce duplication, excess capacity and therefore lower costs. According to a Chatham House report a liberalized armaments market could bring about savings of up to 10 percent in equipment costs as a result of greater competition, as duplicated facilities are closed, first of all in arms importer states like Poland, Spain, Finland, Greece and Portugal.

This is an important step toward a more integrated EU defense market. In the very long term, defense firms could perhaps form supranational “industrial clusters” specializing in certain weapons and begin offering a harmonized portfolio of their products for “off-the-shelf” purchase. But this would require a unified European security policy, which is difficult to agree upon without common threats. However, for the same reason, EU governments should allow market forces to prevail over security and prestige concerns.

Less restricted defense trade of course has the potential to exacerbate proliferation concerns, especially if Europeans start transferring more dual-use materials to states like Russia and China. But in this era, since security competition and paranoia in some regions seem to be unfolding even without European participation, would there be any added danger in that?

Dmitri A. Titoff of Seton Hall University is a foreign affairs analyst residing in Washington, D.C.

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Tags: | China | arms trade | Russia | US | EU | Europe | manufacturing | defense industry |

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