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The Arms Trade as Illiberal Trade

October 26, 2001
Council on Foreign Relations

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[Note: A transcript of this meeting is unavailable. The discussion is summarized below.]

October 26, 2001

Ann Markusen, Speaker

Allan Mendelowitz, Speaker

Lora Lumpe, Speaker

Roger Kubarych, Presider

On Friday, October 26, the RT on the Geo-Economics of Military Preparedness held a session entitled, “The Arms Trade as Illiberal Trade,” with Ann Markusen. Roger Kubarych chaired. Discussants will be Allan Mendelowitz/Federal Housing Finance Board and former Dir. of the U.S. Commission on Trade and Chief Economist of the Export-Import Bank and Lora Lumpe/Norwegian Peace Research Institute. Ann outlined the microeconomic and industry distortions, as well as the national hyper-specialization, caused by offsets. Her main argument was against indirect offsets, which represent 59% of total offsets. Many countries buy more weapons than they could, in order to receive indirect offsets—buying not just weapons, but economic stimulus. Defense companies then sell offset recipient’s products at below market prices in the U.S., which hurts U.S. businesses. This practice occurs because the arms trade is illiberal.

One participant countered that offset agreements represent buying power, not distortions, and that countries have the right to demand all that they can. Roger argued that one flaw in Ann’s paper was her title; the key link is between arms trade and industrial policy, not illiberal trade. Ann argued that security risks stem from direct military offsets, which increase the potential for proliferation and the pace of the arms trace.

Lora Lumpe pointed out that countries that invest in small arms industries are going to export their products. The current glut in international arms means that arms producers will likely sell to anyone. Alan Mendelowitz argued that the reality of foreign policy is that countries sell arms to make friends and to influence events. A participant asked if this offset agreement approach, when applied to new friends such as the Russians, could expand all the way to national missile defense?

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