Arms Trade and Arms Races: A Strategic Analysis

In this chapter we present the main characteristics and problems involved in the study of the arms trade: product definition and data, strategic aspects of the arms trade and regulation. We illustrate these aspects using the latest theoretical and empirical literature on arms trade. The papers reviewed illustrate the complexity involved in studying the arms trade. The nature of the exporters interaction in setting export controls and export policies raises the benefits of coordination in both export control and industrial policies. A failure to coordinate in one of these two policies tends to increase the incentives to deviate from an agreement to coordinate in the other policy, therefore, highlighting the importance of a unified approach to arms trade regulation. Issues such as differences in the security perceptions of exporters, the home bias and the characteristics of the competition between exporter firms may all make the implementation of export controls ever more challenging. Interestingly, although uncertainty will generally make matters worse, it may not if it decreases the effort that exporter firms put into producing higher quality weapons. We argue that supply side regulation will not be enough to prevent arms proliferation among initially non-producer countries, even if supply side controls may have a positive impact on the importers' welfare. In addition, we present a model of the arms trade which encompasses many of the strategic aspects of the problem. The model is mainly based on works by [Levine, P., Smith, R.P. (1995). "The arms trade and arms control". The Economic Journal 105, 471-484; Levine, P., Smith, R.P. (1997a). "The arms trade". Economic Policy, 337-370. October] and [Dunne, P., Garcia-Alonso, M.D.C., Levine, P., Smith, R.P. (2005). "Military procurement, industry structure and regional conflict". Discussion Paper 0502, University of Kent]. It describes the process by which optimization by buyers and sellers within a particular supply regime will result in the determination of prices and quantities. Then the collective action problems suppliers face in establishing an arms export control regime are discussed. Finally, we generalize the model to allow for an endogenous number of firms producing distinct military technologies. We use this model to examine the determinants of market structure in the military sector and how this is affected by globalization in the form of an increasing willingness of governments in arms producing countries to import arms.