In global tends, warnings for U.S industry.

Author:Erwin, Sandra I.

American contractors rule the international defense market, propelled by the overwhelming dominance of the United States as a military power and arms developer.

Their lead is safe for now, but there are early signs of slippage. Economic forces that are playing out in the world could tip the scales over the next decade or two, analysts predict, as developing countries step up investments in defense industries while the United States and Western Europe cut back.

These trends portend both good and bad news for the Pentagon, according to new data by Deloitte Consulting LLP. More defense spending by friendly nations helps shoulder the burden of policing the world at a time when the United States faces steep budget cuts and a growing isolationist strain. By the same token, as other countries ramp up their militaries and defense industries, they will slowly catch up with U.S. technologies and eventually chip away at U.S. manufacturers' massive lead in arms exports.

Of $85 billion in global arms deals in 2011, U.S. firms captured an astonishing $66 billion. Russia came in distant second with $4.8 billion.

Countries like Russia, China and India are positioning themselves to challenge U.S. industrial supremacy over the next 20 to 30 years, says Jack Midgley, a Deloitte consultant. More nations see defense spending as an economic development engine as well as a security policy, he says. "We can expect that to continue."

At 4.2 percent of U.S. gross domestic product, military spending is a key component of the economy. But projected cuts to discretionary federal budgets will continue to squeeze defense. The Congressional Budget Office estimates that by 2023, discretionary spending will reach its lowest percentage of GDP in decades.

The U.S. share of the world's $1.7 trillion in defense spending has dropped from 40 percent in 2012 to 35 percent in 2013. China, Russia and Saudi Arabia have posted the largest increases.

If one looked at these trends through a political lens, they could be seen as evidence of 'U.S. weakness, says Midgley. "But another way to see it is that the rest of the world is converging on U.S. levels of defense capability."

Technological convergence, he adds, "does not necessarily mean hostility." From a macroeconomic standpoint, higher defense spending does not indicate bad intent, he says. "It shows that low-debt countries are moving to the technology frontier in defense."

In the developing world, a combination of above average...

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