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Escaping the Subsidy Trap: Why Arms Exports are bad for Britain

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Paul Ingram and Roy Isbister
1 September 2004

This report, published by the British American Security Information Council (BASIC), Oxford Research Group and Saferworld, counters the economic myths that the UK Government uses to justify its support for arms exports. Escaping the Subsidy Trap: why arms exports are bad for Britain - estimates that Government subsidies to arms exports cost the taxpayer at least £450m and possibly up to £930m a year. These subsidies are not only explicit and direct but also comprise: cheap credit insurance from the Export Credit Guarantee Department (ECGD); Government investment in military R&D; and distorted Ministry of Defence (MoD) procurement.

The report explores the Government myths supporting arms exports:

The Government frequently cites protection of defence jobs as a key reason for supporting arms exports. The report concludes:

  • Employment dependent on arms exports constitutes only 0.25 percent of the national labour force and that far from providing jobs, it diverts skilled workers and investment away from more effective job-creating activity in the civil economy.
  • Any defence jobs lost could easily be accommodated within the overall job market, especially as the skilled manufacturing sector is currently facing shortages.

Wider economy
The Government states that arms exports contribute significantly to the balance of payments and thus benefit the wider economy. The report reveals:

  • Defence exports' share of total UK exports has consistently reduced over recent years; to the point where in 2002, the gross UK arms exports revenue amounted to only 1.5 percent (£4,120m) of total UK exports.
  • A number of leading academics and MoD's own economists have concluded that the economic benefits of arms exports are insignificant and that the "balance of argument about defence exports should depend mainly on non-economic considerations".

Efficient defence procurement
The Government often claims that by driving down the costs of production and equipment, arms exports benefit the MoD by reducing the costs of its domestic procurement. The report reveals:

  • In a competitive global market, far from reducing the cost of domestic procurement, linking export orders with domestic procurement can lead to less suitable and more expensive equipment for our armed forces.
  • The BAE-India Hawk jet deal in 2003 highlighted a rift between Government departments over the deal's economic benefit and revealed that, rather than reducing the cost to the UK, it actually added a £1bn price tag to UK taxpayers.

The report identifies three broad categories under which the UK Government props up economic inefficiency through its provision of financial support for arms exports:

Direct subsidies (£31m subsidy)
Through the Defence Export Services Organisation, the role of defence attachés, the use of the armed forces for promotion and the Defence Assistance Fund, the UK Government provides direct financial (as well as political) support to defence manufacturers totalling £31m.

Export credits (£222m subsidy)
ECGD provides export credit insurance to exporters and purchasers of UK equipment at premium rates that are well below those of the market.

MoD's procurement policy (£200m subsidy)
In order to endorse UK-made equipment for future export orders, MoD appears prepared to purchase kit that is inferior or more expensive than that available from non-UK sources.

The report also considers the impact of Government spending on defence R&D, concluding that this could represent a further subsidy of up to £483m.

This report is a follow-up to the 2001 report The Subsidy Trap: British Government Financial Support for Arms Exports and the Defence Industry.

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