Economic orthodoxy vs market pragmatism: A case study of Europe's abandonment of defence

In 2009, the European Commission (EC) issued the Defence and Security Directive 2009/81/EC. This European Procurement Directive was aimed at evolving a free market in defence, equivalent to the single European market in the commercial sector. For this to happen, barriers to trade would need to be removed and open and free trade in military equipment promoted. This, of course, represents a mjaor challenge. The arms market is unlike any other market. It is characterised by secrecy, high levels of government intervention and control, and structurally it is dominated by monopoly-monopsony industrial relationships at the national level, and oligopoly-oligopsony industrial relations at the global level. There is, moreover, another factor distinguishing the arms trade from most other markets, this is that arms sales are inextricably linked to what is called defence offset. This is where country-buyers of expensive arms, demand some form of reciprocal benefit, such as technology transfer, local production and training, linked to the offshore vendor winning the sale. Paradoxically, these additional benefits lead to second-level competition with respect to the quality of the offset offerings. Although these demands for offset are legal, they are also controversial. The EC, for example, adopts an orthodox ideological interpretation of offset, arguing that it is anti-competitive, trade-distorting and welfare-reducing. Thus, a major implication of 2009/81/EC is that offset between EC member states is deemed illegal. Several European states, such as Poland and Denmark, however, have adopted a pragmatic position with regard to offset benefits, refusing to abandon offset requirements when procuring weapon systems from abroad. This has led to much heated debate, because whilst Europe isolates itself from offset, the rest of the world is expected to rack up close to US$500b worth of cumulative defence-related offset investment by 2016. This paper evaluates the case for and against defence offset, especially in the context of the European Union. Specifically, the paper addresses the question as to whether the case against offset is as clear-cut as the EC would have us believe.