The Chair offers you a summary of the third edition of the webinar series “Les entretiens de l'ECODEF”, which focused on the challenges of measuring arms exports.
In order to give its audiences a better understanding of the economic challenges of defence activities, the Chair offers The ECODEF talks, a series of webinars in which the results of its researchers' work are presented in the form of an interview, followed by a discussion with a leading practitioner on the subject in question and a question-and-answer session with the audience.
The 3rd edition of this webinar, entitled «Arms exports: The challenges of measuring them».» was broadcast live on Wednesday 9 February.
Hosted by Olivier Martin (Chairman of the Steering Committee of the Chair), he proposed an exchange between Renaud Bellais (institutional advisor to the CEO of MBDA, associate researcher at ENSTA Bretagne and Grenoble Alpes University) and Julien Malizard (Deputy Chair).
Why this theme?
Arms exports are the subject of’important debates in France and internationally. In order to understand the issue as objectively as possible, we need to have the most reliable data possible on their volume and evolution. In France, the two most commonly used sources are the SIPRI international database and the Report to Parliament. It should be noted that these data can sometimes differ, particularly given the specific methodologies used by these organisations.
Using France as a case study, this webinar focused on shed light on the problems involved in measuring defence exports and the reasons for the discrepancies observed in these measurements, specifying in particular the advantages and disadvantages of these two methodologies.
The Chair offers you a note summarising the main findings of this webinar, as well as the answers to participants' questions.
What are the current trends in French arms exports?
The analysis is based on a recent publication in The Conversation with Josselin Droff. The aim is to understand the dynamics of arms exports since the end of the Cold War, using data from the Report to Parliament (RAP) for the period 1991-2020. The figures presented are expressed in millions of euros at constant 2015 prices.
- Analysis of deliveries
The table below shows France's export deliveries in constant 2015 euros.
On average, €4.8 billion is delivered each year. There were two periods of «outperformance»: in the early 2000s and since 2015. These were periods when France won major contracts and when international demand for military goods was high (defence budgets were on the rise in customer countries).
- Order analysis
The table below shows France's export order intake in constant 2015 euros.
On average, orders are worth €6.9 billion a year. This is the figure most commented on by political decision-makers. There is an average gap of 3 years between the peaks in order intake and deliveries: as France has no «advance stock» (with the exception of levies on French equipment), this reflects the average time taken to manufacture equipment.
Finally, the differences between these two figures can be explained by differences in scope, in particular the inclusion of services. This point will be addressed below (questions 4 and 5).
- France's main customers
The table below shows France's main customers by decade since the end of the Cold War (1991).
Over the last 30 years, customers from the Middle East (Saudi Arabia, UAE, Qatar) have dominated, accounting for 40% of total exports. Over the last 10 years, Egypt has «made up» for the UAE, although this situation should once again become more balanced with the recent major order for Rafale fighter jets. Europe accounts for almost 20% of the total, but seems to have lost momentum over the last decade. Once again, this situation should soon improve with the recent orders in Greece, Croatia and Belgium. The other major dynamic market is South and South-East Asia, which has accounted for 20% of the total since 2011. The market is becoming more concentrated: between 1991 and 2000, the top 10 accounted for 60% of total exports, whereas between 2011 and 2020, they accounted for 66%.
- France's market share among exporting countries
As the RAP data does not cover international comparisons, it cannot be used to position France in relation to other exporting countries. SIPRI data is therefore used here to answer this question.
The table below shows the market shares of the top 10 arms exporting countries in descending order:
The United States and Russia clearly dominate the market, accounting for almost 60% of total exports since 1991. France is in 3rd place.th with a market share of around 7%. In terms of dynamics, it is important to note the rapid growth of China, but also of South Korea and Turkey, whose market share has tripled in the last 10 years. This is happening at the expense of European producers, particularly in Germany and the UK.
- You mentioned data from the report to Parliament and from SIPRI. Are these data consistent?
In what follows, my comments will be supported by a study, currently being finalised, in collaboration with Josselin Droff and Jade Guiberteau.
The data most commonly used, both in the public sphere and in the academic community, are those published in the report to Parliament and those from SIPRI. Their construction is not identical:
- SIPRI uses a unit known as TIV (trend indicator value), the aim of which is to measure the volume exported rather than the economic value. The calculation method is available on the SIPRI website and shows that the institute assigns a value, in TIV, to each item of equipment. We can deduce from this that the main challenge for SIPRI is to determine precisely the flows of materials exchanged for each supplier-customer pair. While the TIV indicator makes it possible to compare trends over time, thanks to the systematic nature of its analysis, it is not possible to use it in a monetary approach.
- The RAP distinguishes between deliveries and orders. The 2 indicators are monetary in nature, i.e. expressed in euros (constant before 2008, current thereafter). The scope includes physical materials in deliveries, while the orders indicator appears to be broader, including in particular the intangible component.
In terms of trends, as shown in the graph below, the RAP and SIPRI data show identical overall trends.
However, when we look at France's main customers, we see major differences. The following chart shows the top 20 customers based on SIPRI and RAP data:
Several factors may explain these significant differences:
- The number of countries included: SIPRI only includes countries (or sometimes entities not recognised by the international community) to which France has exported at least once, whereas the RAP includes all countries in the world up to 2008 and around 140 countries from 2008 onwards. One notable difference between the 2 databases is Taiwan, which appears as a major customer of France for SIPRI but is not included in the RAP figures (Taiwan is not officially recognised).
- Scope: SIPRI states that it uses data on physical deliveries, local production and production under licence, but excludes Small Arms and Light Weapons (SALW). It is conceivable that exports of (intangible) services are measured very little (if at all) by SIPRI. In the RAP reports, the scope is not clearly defined, but the data is exhaustive for equipment for which there is an export licence. There is still some uncertainty about the extent to which services are included. A notable difference here is China, where SIPRI includes local production of French equipment (helicopters and engines) on the basis of transfers made before the embargo was imposed in 1989, with some doubt as to the existence of corresponding licensing agreements.
- Chronology: the date on which exported equipment is actually delivered to customers can be estimated in the case of SIPRI (which works on an open source basis), whereas it is reasonable to assume that RAP data is based on a delivery schedule that is closer to the reality of flows.
As the unit of measurement is not identical, the two data are not directly comparable. To find out whether, from a more qualitative point of view, they provide the same information, we have calculated the change in exports for each country and each year.
Between 1991 and 2019, on average, the two databases lead to an identical interpretation of the variation in 58% of cases, which means that in more than 40% of cases, the SIPRI and RAP data do not lead to the same conclusion.
Insofar as we do not have the raw data used to construct the two databases, we cannot really identify the reasons for this result. Three hypotheses were tested:
- The results are partly driven by countries to which France never exports (around thirty countries).
- The results for the top 20 show fairly low consistency (around 30%).
- To correct for possible delivery timing difficulties, we use moving averages (of order 3) to smooth out extreme variations. Consistency is marginally improved (60%).
We can therefore conclude that there are few problems with delivery schedules and that the greatest differences relate to the countries in the top 20 of France's customers. It is therefore probably a difference in scope that explains why the two bases lead to different rankings.
Insofar as the SIPRI and RAP data do not lead to the same conclusions, it is important to know the advantages and disadvantages of each of the bases and thus to know in what context these bases should be used.
For the SIPRI database :
- Data is easy to use and available, and the Excel file can be created in just a few minutes.
- A calculation method that allows comparisons over time, particularly during and after the Cold War, but above all between countries.
- But a TIV unit that is difficult to understand and not comparable with monetary units.
For the RAP base :
- A monetary unit of measurement that is therefore comparable with other macroeconomic variables (GDP, defence budget, total exports).
- Reliability guaranteed by transparency, despite a perimeter that is sometimes not very explicit.
- However, it is difficult to compile exhaustive information and knowledge is limited to exports from France.
For international comparisons, SIPRI data is more relevant, whereas RAP data can be used for economic analyses, which are better suited to France.
The amounts involved in major export contracts on the front pages of newspapers are in fact much more complex than they appear, making it impossible to compare public announcements with actual economic flows to the nearest euro. We no longer live in an era where some countries are pure exporters and others pure importers. It is essential to bear in mind that the choices made in terms of scope and measurement are crucial in distinguishing between production in the exporting country (physical flows), support for skills development in the importing country (intangible flows) and the provision of part of the production and support in the importing country in the value of an «export contract».
A number of points should be highlighted:
- The production schedule is long and extends over several years. Between orders and deliveries, there can be significant gaps in time. As a result, the provisional delivery schedule involves a degree of uncertainty (confidential data, necessary system adaptations, production contingencies, etc.), which complicates SIPRI's work in particular. For example, future Rafale aircraft for the United Arab Emirates will be delivered between 2027 and 2031.
- In international contracts, a distinction must be made between physical trade and intangible trade (services, transfers of know-how and knowledge, etc.). Customs authorities are well aware of the former, but the latter are poorly assessed or much less easy to grasp, even though they are a major factor in exports (training, maintenance, studies, etc.). Similarly, technology transfers are not necessarily quantified.
- Contract announcements are essentially political in nature, but do not necessarily reflect the «reality of prices»: major export contracts include firm and optional tranches. While the first are usually guaranteed (but not always, as they only become effective once a deposit has been paid), the optional tranches are often putative. Most of the time, the amount announced is understood to be the maximum possible value of the contract.
- Local content is an increasingly important part of major export contracts, because importing countries want to control part of the production process as part of their industrial compensation package. For example, in the case of the Rafale, the first units exported to India were aircraft manufactured in France, and now Dassault Aviation is exporting assembly kits for local assembly with its partner Reliance. These kits have a lower value than the finished products and often the local content increases as production progresses.
- Equipment sold internationally may differ from French equipment in order to adapt it to the specific operational (e.g. climate) and doctrinal requirements of the importing country. The importing country may wish to integrate components from its own national industry into a platform, or components purchased off-the-shelf from a third country. For example, as part of the submarine contract won by Naval Group in Australia, the weapons system was to be produced by an American manufacturer.
- Are there more structural factors behind the discrepancy between the amounts announced and the reality of industrial arms production?
Historically, there has been a very marked hierarchy at global level between producer countries on the one hand and importer countries on the other. However, this dichotomy is becoming blurred as a result of the internationalisation of arms production, which has accelerated over the last two decades. This makes it more difficult to understand export statistics, as the logic of finished products is gradually being replaced by a logic of intermediate products, and makes it less relevant to interpret exports in a geostrategic dimension by strengthening a country's military capabilities. There are three ways of doing this:
- Cooperative programmes, particularly for European countries. Exports are therefore more a reflection of the circulation of intermediate products or components in a value chain organised on a continental scale. In addition, trade flows can be accentuated by the fact that each partner country wants a final assembly line, as is the case for the Tiger helicopters developed by France and Germany, with which Spain is associated.
This internationalisation is also taking place in the context of transatlantic cooperation programmes: exports from Europe to the United States are tending to converge towards the level of American exports to Europe, as more and more European companies are participating in American weapons programmes. This is the case, for example, with the F-35 aircraft, where European companies are integrated into the value chain around Lockheed Martin for intermediate products.
- The internationalisation of value chains, with civil society companies playing a growing role. For example, land vehicle engines are in fact simply civilian vehicle engines. This is also the case for microprocessors, which are no longer produced specifically for military equipment, but are bought off the shelf.
- The rise of the defence technological and industrial base in emerging countries. Some countries are seeking a form of strategic autonomy in the industrial dimension. This can complicate the strategies of companies, particularly European ones, which need a certain volume of exports (around 30% of sales in the long term for French industry) to guarantee their survival. As a result, many countries are pursuing a policy of import substitution. In the long term, exporting countries run the risk of losing major markets but also of creating competitors, once the country has succeeded in moving up the value chain (at least in certain market segments). Turkey is an interesting example: for a long time it was an importing country, but now it is winning major export contracts.
Questions & Answers :
Q: What is the scope of the two sources? How is licensed production accounted for? Have European countries defined identical perimeters?
A: Licensed production is included in the SIPRI perimeter, which is a significant difference from the RAP, which essentially tracks physical flows from national territory. Another major difference is that SIPRI does not account for Small Calibre Light Weapons (SALW), given the underlying difficulties in exhaustively tracing SALW flows. However, this is not a problem in the French case, as our industry is not specialised in this area.
From a methodological point of view, SIPRI has made an effort to be transparent about its method of calculation, although it is sometimes difficult to read, and the Annual Report does not specify the perimeters used, which makes it difficult to understand the differences between orders and deliveries. In this respect, publications from European countries are not harmonised, which makes them difficult to read and leads to the use of SIPRI data for international comparisons.
Q: Over and above economic measurement, the issue of arms exports and their value is becoming more and more of a political tool, either to enhance the value of exports or, conversely, to denigrate «gun-trading» countries. Don't you think it would be necessary to have a harmonised European instrument that would become a standard in this area, based for example on the COARM (Conventional Arms Exports) report?
The EU Code of Conduct requires Member States to comply with 8 criteria for export authorisations. However, the statistics do not reflect this European harmonisation effort. In fact, each country (and within each country the different departments involved) has its own method, which can lead to heterogeneous national data, making it impossible to compare between countries, and to an imperfect imputation of the trends in the internationalisation of activities mentioned above. As a result, the economic impact of exports is relatively poorly understood, even though it is a major issue for elected representatives.
Q : What is the share of exports in the business of major groups? What about ETIs and SMEs?
On average, exports account for a third of group business. This fluctuates according to national orders and exports. In recent years, exports have grown faster than domestic orders, so that the proportion of business accounted for by exports has been rising for the past ten years. It should be noted, however, that the last few years have seen an upturn in domestic orders, which will allow a certain rebalancing with export figures.
When analysed in terms of the production chain, ETIs and SMEs are present in exports, but «behind» the major groups, which export the complex systems required by customers and account for the bulk of exports. As integrators subcontract 2/3 of the value of their products, small and medium-sized enterprises and SMEs play an indirect or accompanying role in exports.
Q: What impact do exports have on production in mainland France and overseas? Between dual-use products and defence products stricto sensu?
Most production takes place in mainland France. In terms of employment, there is no specific study quantifying the impact of exports (including the breakdown between mainland France and overseas France), apart from an announcement by the Ministry of Defence that major contracts had enabled the defence industry to increase the number of direct and indirect jobs from 165,000 to 200,000.
The difficulty with this exercise is that we only have a partial understanding of the subcontracting chain: the major groups and Tier 1 subcontractors are well known, but the cascade of subcontractors makes it difficult to identify the other components of the value chain.
One possible approach is to estimate the export share of sales and, as a plausible approximation, assume that export-related jobs are of the same order of magnitude (between 30 and 40% in the case of France). There is one notable difference in the nature of the jobs: jobs for domestic orders include more R&D, whereas jobs for exports are more concentrated in production.
Q : Couldn't we use the data from the CIEEMG (Interministerial Commission for the Study of War Materiel Exports) to determine the export values ?
These data are classified and therefore, in principle, cannot be used for research purposes. Data from the RAP and SIPRI indicate cases where exports have been authorised, as they are observed in practice. Partial information on the reasons for refusal is available in the RAP. In addition, the data published in the RAP on export authorisations is incomplete, since an export authorisation does not automatically mean that the export will take place. It can be seen that the cumulative annual amount of export authorisations is almost 10 times higher than the cumulative actual amount of export orders. This is because not only do many authorisations not result in orders, but the amounts presented in the authorisation applications should be interpreted as ceilings to cover contract negotiation contingencies.
Q : How is intellectual property valued in arms exports?
Contracts can value the intellectual property that is transferred, but this is a financial agreement between the parties and not an economic valuation. This is always a difficult issue for companies in any field, but it is even more so for defence companies, which are not used to considering their intangible assets beyond secrecy and non-proliferation. A recently published work by Renaud Bellais, Damien Coadour and Josselin Droff offers an element of explanation. More generally, elements can be found in the work «.« Capitalism without capital ». The value of «intangibles» is often poorly understood: intangible assets, in particular the value of patents, are not always well known, even by companies in the sector.
Q : What are the consequences of the green taxonomy for the export of defence equipment?
ESG rules will be imposed on the defence industry in terms of the environment (the sector will not be a priority for investors if it scores less well than others on the «best in class» principle), governance (the problem of secrecy linked to sovereignty contracts) and social issues (banking institutions may refuse, as a matter of principle, to produce arms because of their interpretation of the social issues involved in arms production and the purpose of the equipment). This could have major consequences for defence companies in terms of access to bank finance for investment and export contracts. It is essential that all stakeholders, not only companies but also the political authorities of exporting countries, stress the importance of the defence mission at the social level and the contribution of defence exports to the sustainability of this defence mission.
Q: Can we expect the complexity of cooperation to increase with European initiatives such as permanent structured cooperation or the European Defence Fund?
Today, the European armaments market is still largely a juxtaposition of national markets, supplemented by cooperative programmes. The European Commission is determined to create the conditions for the development of a genuine European defence (common objectives with the strategic compass currently being drawn up, support for the DTIB at the technological level, joint acquisition of critical military capabilities through cooperation between European defence industrialists thanks to the European Defence Fund, which could eventually lead to the integration of defence industrial and technological bases in Europe). In short, the initiatives launched several years ago by the European Union (Permanent Structured Cooperation, European Defence Fund, Strategic Compass) are a priori positive and should increase cooperation between European partners. However, it remains important to ensure that the rules implemented by the European Union, particularly under the EDF, allow for the harmonious and efficient implementation of this cooperation in the interests of the Member States and their defence policies.
Q : How can intermediate consumption be taken into account?
US customs statistics distinguish between final products and intermediate consumption. The main difficulty lies in understanding the value chains involved in quantifying them, as some intermediate consumption is related to civilian products. In work on the economics of international trade, quantification is done in terms of value added, which de facto excludes intermediate consumption.
Q : How can technology transfers be better taken into account?
It is difficult to take them into account because technology transfers are not systematically recorded for reasons of access to information in contracts. The emergence of customer country DTIBs may be a symptom of these technology transfers. Moreover, the economic value of these transfers is not necessarily well known, even to companies.
You can watch the entire debate in the webinar video, available at here.
Download the PDF version of this summary here.
