Defence Industrial Policy in a Military Alliance

Much of the alliance literature has focused on the collective defence benefits and burden-sharing. This article considers the potential for developing a defence industrial policy in a military alliance. Previous proposals from the literature are reviewed, especially proposals for economic specialization based on comparative advantage applied to both armed forces and defence industries in a military alliance. European Union (EU) defence policy is outlined, including its armaments agencies (OCCAR and the European Defence Agency), and inefficiencies in EU defence markets are identified. Economic theory offers some policy guidelines for an efficient defence industrial policy in a military alliance, including gains from trade and competition, from learning and scale economies, and from reducing the duplication of costly R&D. These economic principles are applied to the EU and are also applicable to NATO. Evidence of efficiency gains from trade and from economies of scale and learning is reviewed and applied to various scenarios for the creation of a Single European Market for defence equipment. The scenarios include a liberalized competitive market, a centralized EU procurement agency and a ‘twin-track’ model. Estimates are presented of the cost savings from these scenarios. However, proposals for an efficient defence industrial policy will be opposed by the potential losers who will prefer alternative industrial policies involving international collaboration and offsets. Among these alternatives, collaboration is assessed as a distinctive European policy. The inefficiencies of collaboration are reviewed, including its impact on development and production costs and on delays in delivery. Consideration is given to the research issues to be addressed by an economic evaluation of European collaborative projects. The article concludes by stressing the inefficiencies of current procurement policies in the EU and NATO and the potential cost savings from the adoption of a more efficient defence industrial policy within an alliance.