Key Points
- A national security exception protects countries’ subsidies for military production from international trade rules.
- In some cases this security exception channels money from the civilian to the military sector.
- By favoring arms sales over other forms of trade, the security exception fuels armed conflict.
Weapons, from handguns to fighter jets, are a profitable business. Generous government contracts, huge profit margins, and inevitable cost overruns ensure spectacular dividends for weapons producers. Conflicts burning throughout the world guarantee plenty of buyers. After a post-cold war decline, global military spending rose in 2000 to $800 billion. In the aftermath of the September 11 tragedies, arms production and sales worldwide will likely continue its upward trajectory—encouraged by national policies and protected by international financial institutions.
Although most military contractors are neither “infant” industries in need of nurturing nor spent giants on the verge of bankruptcy, states continue to subsidize weapons production. Even the most die-hard laissez-faire governments, committed on paper to maintaining a firewall between the state and the economy, are propping up their arms manufacturers. The U.S., for instance, provided $1.2 billion in tax relief in 1993 when Lockheed merged with Martin Marietta to form the world’s largest arms manufacturer.
According to the logic of free trade, the cornerstone of globalization,
such subsidies are “nontariff barriers to trade.” They are,
in other words, an unfair advantage enjoyed by a company doing business
in the world market. And international financial institutions are committed
to removing such advantages.
But every trade accord treats military subsidies as different from all
other subsidies. A “national security exception,” included in
the original 1947 General Agreement on Tariffs and Trade (GATT) and in
every trade accord since, allows states to subsidize production, promote
sales, and impose any trade embargoes that they deem necessary to maintain
national security. So, according to free trade rules, if the U.S. subsidizes
the production for export of a passenger jet, other countries can file
grievances through the World Trade Organization (WTO). But the U.S. can
subsidize the overseas sale of a Boeing F-15 fighter jet, and no country
will call foul.
In some cases, this security exception channels money from the civilian
to the military sector. The Canadian government subsidized civilian passenger
jets produced by Bombardier Aerospace, until other countries protested
through the WTO. So Canada switched to subsidizing Bombardier’s military
production. Other countries view military production as the dangling rope
that will pull them out of their current economic difficulties. For example,
the national security exception continues to protect the South African
government’s subsidy of Denel, the state-owned weapons producer.
Government subsidies often result in cheaper weapons. By favoring arms
sales over other forms of trade, the security exception creates more bang
for the buck and a heightened risk of regional conflict escalation.
Structural adjustment—another key component of globalization—involves
a similar security exception. Acting on the advice and pressure of the
International Monetary Fund (IMF), states have slashed government budgets
and privatized government industries. But defense budgets have largely
remained off limits, despite IMF encouragement for reducing them. Although
many governments have privatized military production and even military
operations, they maintain indirect subsidies (through tax relief or export
guarantees) and have arranged continued access to civilian infrastructure
for military purposes.
Globalization, in the form of increased world trade and neoliberal structural
adjustment, is in theory designed to increase competition. Companies compete
against one another on a global basis to produce the cheapest and most
profitable products; governments step back from the economy to allow this
competition free rein.
But the logic of the modern military system is quite different. U.S.
global military dominance at the nuts-and-bolts level is held together
by cooperation: building alliances, conducting joint exercises, selling
compatible weaponry, and supplying spare parts. The majority of weapons
sales are part of global alliances—between the U.S. and Israel, the
U.S. and South Korea, and so on. Transnational mergers of defense contractors
are building on an earlier trend toward the coproduction of weapons systems.
And in the name of national security, governments intervene repeatedly
in their economies to enhance the competitive edge of their military producers
in the international marketplace. State-planned economies have largely
disappeared in the post-cold war world, except for the subspecies known
as the military-industrial complex. International financial institutions
such as the WTO and IMF have helped sustain an environment in which this
far-from-endangered species can flourish. The security exception enables
governments to globalize their military production while largely bypassing
the fierce competitive forces of globalization.
Problems with Current U.S. Policy
Key Problems
- An array of U.S. programs exploits the security exception to help
U.S. manufacturers compete internationally.
- This rule, which theoretically applies equally to all countries, in
fact helps lock in U.S. dominance of the global arms market.
- Washington’s military objectives—e.g., to promote China
as the next peer enemy—conflict with its economic objectives to
globalize trade.
The Pentagon and Wall Street are close compatriots, and not simply in
the minds of international terrorists. U.S. military power and economic
might are the imperial prizefighter’s one-two punch.
Arms production and sales lie at the intersection of these two global
policies. Through various economic means, the U.S. government exploits
the security exception to help U.S. arms manufacturers compete internationally.
It helps other countries buy U.S. weapons (Foreign Military Finance Program),
gives away weapons purchased from domestic suppliers (Excess Defense Articles
Program), finances extensive research and development (R & D), and
relentlessly engages in sales promotion overseas. Tax policy, too, has
been shaped to help defense contractors. In 1993, the U.S. government
changed its policy on federal reimbursements connected to mergers and
acquisitions in the defense field. In response, Boeing reversed its transition
away from military production, quickly swallowed McDonnell Douglas and
key divisions from Rockwell International, and grew into the nation’s
largest arms exporter.
The Export-Import (Ex-Im) Bank, which beefs up the U.S. export sector,
is by law not allowed to encourage military sales. But there are two major
exceptions. U.S. firms can supply military buyers with practically anything
connected to drug interdiction. The Colombian military and Sikorsky Aircraft
have been prime beneficiaries of this exception, with the Ex-Im Bank facilitating
the sales of 19 Black Hawk helicopters. Second, Ex-Im can help finance
the sale of dual-use products, which can serve both civilian and military
ends. In recent years, such dual-use sales have gone to Romania, Indonesia,
and Turkey, among others.
The U.S. government has applied this dual-use logic in a different way
in an arena the WTO currently doesn’t cover: maritime transport.
In 1982, the Reagan administration eliminated direct subsidies of the
shipbuilding industry. But in the 1990s, the U.S. Navy was shrinking,
and orders for ships were drying up. The role of U.S. flagships in the
commercial shipping trade—the circulatory system of globalization—had
fallen to less than 1%. The U.S. shipbuilding industry demanded change.
The Clinton administration, in 1996, got around this ban with the Maritime
Security Program (MSP). The U.S. government subsidizes the construction
of ships that will serve the Pentagon in times of national crisis. At
other times, the ships engage in the more sedate task of hauling goods.
This is a win-win proposition for Washington: boosting the U.S. share
of the commercial shipping trade and guaranteeing Pentagon access to more
naval capacity when needed.
But that’s not all. For the modest investment of $100 million a
year, the Pentagon gains access to the entire system of the ship companies—ports,
trucks and rail, tracking systems—in times of emergency. This arrangement
is called VISA, the Voluntary Intermodal Shipping Agreement. The U.S.
argues that subsidizing commercial shipping is critical for national security,
so even if maritime transport is liberalized, these subsidies will be
exempt from WTO regulations.
Although WTO members have successfully challenged some U.S. subsidies—as
in the 2000 WTO decision to strike down the offshore tax shelters known
as Foreign Sales Corporations– they have been largely ineffectual
in challenging the overwhelming advantages the U.S. enjoys in the military
marketplace as the world’s largest weapons producer, exporter, and
subsidizer. The security exception grants a general exemption that all
countries can exploit. But because of U.S. dominance, the exception locks
in the advantaged U.S. position.
U.S. national security also frequently trumps the most dramatic of economic
restructuring: IMF structural adjustment. For South Korea, reeling from
the Asian financial crisis of 1997, the IMF recommended reductions in
military expenditures. But the U.S. government argued otherwise. Washington
supplies Seoul with most of its weapons and considers such sales not only
profitable but essential to Korean national security. A similar situation
applies to Turkey, a key U.S. ally that has sheltered its military budget—an
eye popping 14% of GDP—from IMF-inspired reductions.
Yet, the Pentagon and the Commerce Department do not always see eye to
eye. U.S. military policy, looking backward to the cold war era, depends
on the maintenance of threats—terrorists, drug traffickers, North
Korea, Iraq—that can substitute for the role played by the defunct
Soviet Union. U.S. economic policy, although forged in the crucible of
the cold war, looks forward to an era of the single global market where
ideological disagreements don’t interfere with making a profit.
This Janus-faced global policy produces interesting interference patterns.
Take the example of China and the aircraft manufacturer Boeing. China
accounts for 10% of Boeing’s business. To exploit cheaper labor costs,
Boeing has also outsourced manufacturing to China’s army enterprises.
Economically, China is one of Washington’s best friends, a major
destination of U.S. investments, and the producer of a multitude of U.S.
imports. With Boeing’s vigorous lobbying, the Commerce Department
ushered China into the WTO as quickly as possible. But militarily, China
remains an enemy, albeit a poorly equipped one, and the Pentagon needs
the Chinese threat to justify both the 100,000 U.S. troops deployed in
the Asia-Pacific and a technologically suspect missile defense system.
Only a greater threat—the Soviet Union of yesteryear, Osama bin Laden
today—can temporarily transform China into a military ally.
Although the underlying vision of U.S. foreign policy is incoherent,
Washington tries to have it both ways: the limitless threats of the cold
war and the boundless markets of “McWorld.” Throwing money at
the problem—a $379 billion military budget that includes substantial
support for overseas sales and investment—does little to resolve
this central tension between military and economic objectives.
Toward a New Foreign Policy
Key Recommendations
- Policy critics can highlight the disconnect between laissez-faire
economics and support for the military industry.
- These critics can prod the IMF to strengthen its stance on limiting
military spending.
- Revenues from a military Tobin tax on the arms trade could be used
for nuclear and other weapons disposal and the conversion of military
industries.
When their strategies converge, the Pentagon, Commerce Department, and
international financial institutions make for a powerful trinity. At a
global level, when this unholy trinity supports the spread of arms, the
increase of defense budgets, and the dominance of arms manufacturers,
the deck is stacked. Yet there are some ways to challenge this nexus of
globalization and militarization.
The chief dilemma, a variation on the “inside-outside” conundrum,
is whether to challenge these institutions to play by the rules they have
developed or to challenge the rules themselves. Let’s consider the
first tactic. In part because of the criticisms of watchdog organizations
and demonstrators in the streets, the IMF is now more willing to argue
for reductions in defense budgets, as it has done in South Korea, Peru,
and throughout Africa. Policy critics can challenge the institution to
follow its own “best practices.” According to this tactic, the
IMF’s budget cutting zeal is channeled to reduce military expenditures
worldwide.
By the same logic, the Bush administration can be pressed to extend to
the military sector its well-known aversion to industrial policy. The
defense industry enjoys the advantages of corporate welfare through tax
loopholes, export assistance, R & D subsidies, and various guarantees.
Even a soupcon of laissez-faire ideology would improve this toxic recipe.
Meanwhile, the Bush administration’s aggressive diplomacy on behalf
of domestic defense contractors can also be considered a nontariff barrier
to trade. To persuade the South Korean government to buy F-16 fighter
planes, the U.S. announced that it would not help integrate U.S. weapons
and cryptographic systems should South Korea opt for the French fighter
instead. Here again, critics can charge the Bush administration with blatant
interference in the free market.
Critics can similarly press the WTO to begin severing the ties that interweave
the military-industrial complex. Although the WTO’s security exception
is a tough nut to crack, countries can indeed challenge subsidized military
programs whose primary purpose is to enhance civilian production. The
various incentives that the U.S. government offers private cargo carriers
to purchase Boeing’s C-17 Globemaster military transport plane or
the recent government decision to lease Boeing’s civilian 767s for
military purposes at the cost of $26 billion can be criticized on such
grounds. If transportation services are liberalized at the WTO level,
the Maritime Security Program will also fall into this category.
The second tactic is to challenge the rules themselves, because the rules
are biased in favor of the powerful. One of the more potent tools to be
deployed against the military-industrial complex is a demand for transparency.
Strengthening requirements for registers of arms transfers and exposing
corrupt deals such as the recent British-Saudi Arabian weapons-for-oil
deal can begin to build new systems of rules that will contain the global
arms trade in much the same way that the Lilliputians used slender filaments
to restrain the giant Gulliver. International codes of conduct, like the
one proposed by former Costa Rican President Oscar Arias and other Nobel
Peace laureates, could introduce minimum standards into a destructively
liberalized environment (the Arias plan has recently been turned into
a framework convention which, if and when it becomes international law,
will require states to comply with strict criteria on international arms
transfers).
Such measures would pave the way for more radical steps. A military Tobin
tax, levied on every cross-border military deal, would generate funds
that could be used to destroy nuclear and other weapons as well as to
convert defense industries to civilian production. More subversively,
such a tax could throw sand in the cogs of the emerging global military-industrial
complex, just as economist James Tobin imagined his tax on financial transactions
would slow the rapid-fire transfer of capital around the world.
As a result of the September 11 attacks, the dangers of globalized militarism—the
deregulation of weapons markets and the privatization of militaries—have
become apparent even to the Bush administration. Weapons can end up anywhere;
terrorists can raise funds in deregulated financial markets and unregulated
black markets; private armies can rival state militaries. State subsidies
for military production, protected by the security exception, have only
increased the number of weapons available. In this new era, international
institutions should permit government subsidies, investments, and taxes
that reduce armaments, redirect funds from the military to the civilian
sector, prevent weapons from reaching repressive and aggressive states,
and otherwise dismantle the economic motor of globalized militarism. This
is the only type of security exception to free trade regulations and budget
restrictions that makes sense in a world awash in weapons.
John Feffer is the author of Shock Waves: Eastern Europe After the Revolutions, the editor of the forthcoming Living in Hope: Community Challenges to Globalization (Zed, 2002), and has recently returned from three years based in Tokyo working on East Asian issues.
