War, what is it good for? Combat and deployment to foreign countries has one of the greatest impacts on the budget of the United States and the budget of its allies. Violence and terrorism have created global flash points that don’t abide by borders or geopolitics, costing governments millions in preventative measures. Violence comes with a much more personal and heartbreaking cost as well. There are an estimated 845 small arms on the planet, roughly one for every seven people. The defense industry made a pretty penny in making these arms and the market was projected to double by 2020. In 2012, the world spent about $1.6 trillion on weapons, so we’re already at a breakneck pace.
Here is the share of military expenditures of the top 15 countries.
The United States has been leading the pack in defense spending for years, but something surprisingly new is that global military defense spending in 2012 was the highest in real dollar terms since the end of WWII. One thing is clear, weapons are not going out of style.
When you look at it per capita though, the picture looks a little different.
The general workings of the market are straight forward. Most countries have a military industrial complex that allows for domestic production and the leftover is exported to buyers. This market responds to the typical forces of supply and demand. Small arms are actively traded on legal and illegal markets and are highly coveted by governments, civil organizations, and individuals because they are often seen to provide legitimacy. More about the purchasers?
On the left, blue represents the countries that create arms, and red represents the countries that purchase arms. (Source)
Here’s that information in terms of countries that produce the weapons.
These expenditures can take the form of arms imports, training for their military, maintenance, etc. Developing nations are the primary focus of foreign arms sales, especially in Northern Africa and Southern Asia where there is a greater need to catch up militarily to the rest of the world. The import trends for these imports are determined by the strengths of a country’s economy. Furthermore, just ten countries receive about 61% of the total arms that go to developing nations. India recently has been working hard to re-militarize. Keep an eye on Tata.
On the other end of the supply chain, the United States is responsible for most of these weapon exports. In 2010, the US increased its market share of weapon exports to 53%, a number that has been steadily rising in the previous years. America shipped weapons to 62 different countries that year. Not to mention, of the top 20 corporations by revenue, the United States domiciles 16 of them. Next in line for arms exports are the usual suspects: Germany, France, Britain, China, and Russia. Many Middle Eastern countries began purchasing arms from the United States after the 1991 Gulf War when the US established itself in the region as a dominant military power. Recent concerns about Iran have only fueled exports to the region. Developing nations love defense imports because of something somewhat sinister; offsets.
Offsets are little investments that get tacked onto arms deals. Let’s say Saudi Arabia purchases a contract of F-16 Falcons from General Dynamics. Saudi Arabia will somewhat informally require General Dynamics to invest 20% of that contract in Saudi Arabia. This all started in the 1950’s when Eisenhower forced West Germany to purchase American-made defense gear to compensate for the costs of stationing troops in Europe. The practice is now sanctioned in 120 countries and a consultancy company close to the matter estimates that these obligations would grow to about $450 billion by 2016. This means that about $450 billion of mostly US corporations must redirect investment to foreign countries so they can eventually become domestically dependent for their arms. The World Trade Organization bans this practice in all industries besides the defense industry. This is probably a problem, as most economists agree that offsets have a market disorienting effect.
Speaking of developing countries, they are rife with black market small arms sales. Small arms violence accounts for 200,000 to 500,000 deaths per year, but most of those deaths occur because of civil conflicts like the one in Syria. The United States also houses a black market for arms. The ATF (Alcohol, Tobacco & Firearms) is tasked with dismantling this trade in the United States, but the illicit market is prolific despite these efforts. Pistols and rifles are usually only a few hundred dollars more than retail prices, so you might wonder why store owners of legal weapons would risk their businesses for that marginal profit. The answer is that they generally don’t. Most store owners are trying to fight the black market, as it takes away from their own sales. About 1% of federally licensed firearms dealers illegally sell 60% of the weapons that are found at the aftermath of violent crimes. Employees at these gun stores tend to be the ones selling them illicitly.
How can we apply this to the stock market? Well, the basket of Aerospace and Defense Stocks outperformed the S&P by 100% from April 2013 to April 2015, so if you know what you’re doing you can make a pretty penny. Understanding what it takes to follow through on a defense contract may help you make better picks, or just being in the sector could prove profitable. From a more global perspective, war is an expensive and destructive act across the planet. The Global Peace Index is provided by Vision of Humanity and is telling about how we are doing as a society.
We are much more likely to spend on war than on peace. The United Nations has a budget that is only 1.8% of the defense spending of the entire planet. There may be some debate about how effective the United Nations is at brokering peace and facilitating international cooperation, but maybe that’s because countries would rather buy guns than write demilitarization pacts and donate to the UN. Vision of Humanity estimated that the total impact of violence in 2016 reached $14.3 trillion dollars, that’s about 13.4% of global GDP. Per capita that’s about $1,800 per person on the planet. This doesn’t even factor in the emotional, psychological, societal, and lasting devastation that war leaves in its path. As lucrative as war is, we should be thinking harder about ways to limit its devastation. It’s hard to find peace when you’re already buying or selling war.
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