So much effort and subsidy are devoted by governments to encouraging weapons sales that it would pay to reduce them

In a Viewpoint on December 9, I summarised some of the attempts made by Tony Blair's UK government to restrict the sale of arms to countries which violated human rights. Yet there remains a continuing tussle between the Foreign Office, which tries to promote an "ethical foreign policy" and the Department of Trade and Industry, which is more interested in exports.

In fact, so far from their being vital for the economy or for employment, the cost of cutting arms exports would be modest.

My excuse for returning to the subject is to report on a couple of studies of the impact of UK arms sales.* To begin with, these explain the widely varying estimate of such sales. One reason is that Customs figures do not include the bulk of aerospace exports. Adding those back gives a maximum average estimate of £4bn ($6.6bn) per annum over the decade 1985-95 at 1995 prices. Even then they only accounted for 0.6 per cent of gross domestic product.

Both studies examine the impact of a one-third reduction in arms exports based on the average of the decade 1985-95, and expressed at 1995 prices. The output of weapons and ammunition would have been cut by about 12 per cent, and that of aerospace products by 9 per cent.

The maximum number of jobs lost would have been 40,000. On the basis of labour turnover estimates, it is likely that 40 per cent of those made redundant would have found new work within a year and another 13 per cent in the year after that. About 27 per cent would have taken more than two years to find a new job. Some 20 per cent would have left the labour force.

The impact would have been greatest where defence employment is concentrated in one or two plants in towns such as Bristol, Plymouth and Yeovil.

The hypothetical one-third cut in arms exports would have initially reduced total exports of all goods and services by some ½ per cent. Nearly half of this would have been replaced by alternative exports produced by redundant workers finding new work within a year. The rest could be found partly from those finding work later, and partly from other shifts within and between industries along the lines I previously discussed.

Against these modest industrial costs have to be set government budgetary savings. An obvious example is the Defence Export Services Organisation, which is meant to provide marketing and military assistance in support of sales. A National Audit Office survey in 1989 found only about 16 per cent of arms-exporting companies would have been willing to pay for the organisation's services had they not been provided free. There is also the activity of ambassadors, ministers and royals in promoting arms sales.

These items, while colourful, pale into insignificance compared to two large cost items. These are the activities of the Export Credit Guarantee Department (ECGD) and the adverse effect on British defence procurement costs.

The ECGD's short-term export insurance services were sold to the Dutch insurer NCM in 1991. There remains in government ownership a project group to help exports of large capital goods, and construction projects with medium and long-term credit. It provides cover of up to 90 per cent against political and commercial risks. The areas covered extend well beyond arms, and include controversial projects such as Pergau Dam in Malaysia and the Ilisu development in Turkey. It is estimated that a cut of a third in arms sales would have saved the government an annual average payment of nearly £76m to the ECGD.

It should be admitted that the costs of the ECGD were very much less in the last couple of years of this period. But in an industry with such large year-to-year variations, it is far too early to conclude that this cost has been eliminated. Even if accounting losses were zero, there would still be a resource cost. The public sector was set a real rate of return target of 8 per cent in 1989, while the ECGD is required to do no more than break even on average. Andrew Tyrie, formerly a special adviser to former prime minister John Major, and now a Conservative MP, wrote in the FT on February 1 1991: "It is illogical to indulge in a competition to give away our own exports through an auction of subsidies." Huw Evans, a former Treasury deputy secretary, has recently said that the ECGD is too vulnerable to intensive lobbying of ministers by large corporations and that it should become an independent agency. A report on the ECGD by a Commons select committee is due soon.

A more subtle cost is that the government has to take into account not only value for money but supposed "industrial and employment benefits" in placing military orders. In 1995, recommendation by the Equipment Approvals Committee recommendation in favour of the US-designed Chinook helicopter was overridden by the secretary of state for defence in favour of a mixed order involving Britain's Westland.

The authors search for positive overspill benefits from promoting military exports to offset against these costs. The largest they find is the contribution of exports to the overheads of companies that also serve the home market. The second largest comes from the contribution of exports to research and development.

Netting all their estimates out, the defence economists arrive at an annual budgetary gain of £76m from the postulated cut in arms sales. One does not have to pretend that these estimates are precise, or that the cost saving is enormous. The thrust of the argument is that the net effects on the British economy of reducing arms sales are negligible or even favourable.

* The Subsidy Saving From Reducing UK Arms Exports by Stephen Martin, Journal of Economic Studies Vol 26; 1. Impact of Restricting UK Arms Exports by S Martin, K Hartley and B Stafford, International Journal for Social Economics, vol 26;6