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

by Loren Yager

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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. Large increases in defense spending might create pressure for higher prices for scarce inputs, and result in higher costs for non-defense high-technology industries in the United States. Since domestic — but not foreign — production costs are likely to increase, this would raise the costs of U.S. high-technology industries relative to those of foreign countries, and could 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 are, in fact, industries such as electronics, aircraft, and communications equipment — generally considered high-technology industries. The author developed a measure of trade performance that would screen out the influence of factors that affect the trade performance of all sectors (e.g., exchange rate changes) leaving the influence of sector-specific factors such as the effect of defense spending. Based on this measure, the industries with the best trade performance over this period include some high-technology industries as well as other industries. Tests of the relationship between the impact of defense spending and the trade performance of industries provide no evidence that the increase in defense spending contributed to the poor trade performance of high-technology industries. The regression results include both positive and negative coefficients, and none of the t-statistics indicate a statistically significant relationship. Calculations using the trade metric for a variety of years or different sources of data have little impact on the regression results, indicating either that there is no effect of defense spending on trade performance, or that the methods were not sensitive enough to measure the effect. Using data on the increase in sales that were generated by the defense buildup for each industry, a mixed set of results suggests that there may be some positive effects of defense spending.

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