Any process to regulate international arms transfers must consider the trade-off between sales and potentially adverse security repercussions. In Discussion Paper No. 770, Research Fellow Paul Levine, Somnath Sen and Ron Smith consider the market for major conventional systems which account for the bulk of reported trade. Producer governments determine supply since exports are highly controlled; demand reflects strategic factors and purchasers' resources; prices reflect demand conditions, supply restrictions and a range of implicit subsidies. The authors examine four basic cases. Sales to allies (adversaries) increase (reduce) supplier security; arms sales may be stabilizing up to a limit determined by the recipient's legitimate security needs but destabilizing thereafter; or supplying arms can provide leverage to co-opt a hostile regime into the international security order.

Oligopolistic, forward-looking supplier governments have both economic and security objectives. Recipients' behaviour depends initially on current military capability, which is determined by their accumulated stocks of arms and the sum of their purchases from various producers. Transfers to a potential adversary are always lower than in a free market with uncontrolled private firms, but the volume of trade increases with the number of supplier governments; the other solutions also accord with experience. If recipients are also forward looking and base their behaviour on expected future military capability, incorporating expectations about probabilities of resupply in time of conflict and future arms embargoes, then supplier credibility is also important. A supplier that can credibly precommit to announced deliveries can exert leverage over a hostile recipient, so transfers are lower than for a comparable myopic recipient. But if a recipient can exploit a supplier's inability to precommit, such transfers are higher. This `time-consistent' solution is interesting because suppliers often renege on their declared policies to embargo or resupply. Levine, Sen and Smith also examine the effects of operating a suppliers' cartel and discuss possible extensions to account for suppliers' differing objectives and a more explicit characterization of recipients' behaviour.

The Economics of the International Arms Trade
Paul Levine, Somnath Sen and Ron Smith

Discussion Paper No. 770, February 1993 (IT)