The Effect of Defense Spending on the Trade Performance of High-Technology Industries

Abstract

Abstract : Defense spending is often cited as a factor that influences the performance of particular industries. This study examines the large increases in U.S. defense spending during the late 1970s and early 1980s to determine whether these changes affected the trade performance of U.S. high-technology industries. The U.S. surplus in high-technology trade decreased sharply from 1980 until 1986, when it recorded a small deficit for the year. The research approach was to identify industries -- industries that use many of the same scarce inputs as the defense industry, and must compete with the defense industry for those inputs. Large increases in defense spending might create pressure for higher prices for scarce inputs, and result in higher costs for defense-competing industries in the United States. The focus of this study is on labor inputs, since unlike intermediate products, additional supplies of labor do not readily flow from foreign sources to the United States. Therefore, domestic -- but not foreign -- labor costs are likely to increase, and this would raise the costs of U.S. defense-competing industries relative to foreign industries. This foreign cost advantage could potentially lead to lower levels of U.S. exports and higher levels of U.S. imports in the affected industries. The study suggests that the industries that compete most directly with defense producers for inputs include electronic equipment industries (electronic components, radio, TV, and communication equipment, computers and office machines); machinery industries (metalworking machinery, non-electrical machinery, special industry machinery); and transportation equipment industries (aircraft and parts, other transportation equipment). These are the industries that should have faced the largest increase in costs as a result of the 1980s defense buildup.