Defense Spending and the Trade Performance of U.S. Industries

U.S. defense spending increased sharply during the early 1980s, especially in the defense budget categories of procurement and research, development, testing, and evaluation. Purchases from these categories are concentrated in a small number of high-technology industries. During this same period, the U.S. surplus in high-technology trade declined sharply. This report examines the effect of increases in defense spending to determine whether they contributed to the poor trade performance of high-technology industries. The authors develop trade performance measures to highlight the performance of sectors that are exposed to different degrees of competition for scarce inputs. Industries with good trade performance include plastic and rubber medical supplies, optical instruments, and missiles and space vehicles. Those with the poorest trade performance include iron and steel products and also service industry machines, yachts, and fabricated structural metal products. The findings suggest that, to the extent that increases in defense spending led to a higher budget deficit, they may have contributed to poor trade performance in the form of a higher overall trade deficit by increasing the value of the dollar. But the authors find no evidence that increased defense spending was particularly damaging to the trade performance of high-technology industries.