Procurement: Billions More To Buy American

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November 18, 2015: In 2015 American defense firms are having the second highest annual export sales in history; $46.6 billion. In practical terms 2015 was the highest year for sales because the current top year (2012) was $65 billion but 69 percent of that ($45 billion) was two very large sales. One was a large ($35 billion) order from Saudi Arabia for F-15s and the other was a $10 billion order from Japan for F-35s. Normally those orders are made in smaller quantities but the Saudis are concerned about Iran and Japan about China. Both countries are among the few countries that can place such large orders. Without those two orders 2012 sales would have been what was expected; $25 billion in smaller orders from many customers. That’s what all the 2015 orders were.  This was a 31 percent increase from the $34.2 billion in 2014 which was a 23 per increase over 2012.

While U.S. defense exports are growing so are those of China, which has become the third largest arms exporter in the world surpassed only by the United States and Russia. Now the top five consists of America, Russia, China, Germany and France. Britain was displaced from the top five in 2012. From 2005-9 China represented three percent of the world arms exports. From 2010-14 China moved up to five percent.

Meanwhile sales of the 100 largest weapons and military services firms fell for the third year in a row in 2013 and the situation has not improved since then. While the Russian and Chinese firms are doing very well and the American ones are holding on many European firms are losing ground. Then there’s all the new competition from firms in South Korea, Israel and China. Even the Japanese are changing their laws to allow their arms firms to export.

Russian arms sales rose sharply after 2001 because the economies of their two biggest customers (India and China) were increasing rapidly. That and the escalating price of oil (driven largely by increased demand from China and India) have sent international arms sales from $29 billion in 2003 to over $70 billion today. Oil rich countries, particularly those in the Persian Gulf, are eager to buy more weapons with which to defend their assets from an increasingly aggressive Iran.

The stall in Russian sales after 2007 arose from a special problem with China, long one of its biggest customers. Since the late 1990s about 40 percent of Russian arms exports went to China. That began to shrink as Russian manufacturers feuded with the Chinese over stolen technology. The Chinese have been quite brazen of late as they copy Russian military equipment and then produce their own versions, without paying for the technology. Worse, the Chinese are now offering to export these copies. The Russians tried to work out licensing deals without much success.

Another factor in the sharp growth in arms exports was largely because, after 2001 global defense spending increased nearly 50 percent to over $1.4 trillion. That's 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 62 percent in the last decade. The region with the lowest growth (six percent) was Western Europe. The 2008 recession led to global defense spending stalled at, or maybe even a little below, $1.4 trillion. But the spending growth has resumed, slowly, now that the recession is over in many parts of the world. China is making the most of that, especially since they will sell to anyone who can pay and are not deterred by demands for bribes and other off-book services.

 

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