Middle East Unrest Affects American Manufacturing

Aviation Week & Space Technology reported in its Feb. 28 issue that unrest in the Middle East and North Africa appears to be causing delays of decision-making on larger weapons acquisition deals in the area.

Aerospace industry pauses briefly in mid-air

Delays in large purchases are to be expected, of course, as countries in the Middle East watch to see what they’ll actually need as new governments shake out.  But wait-and-see is still troubling news for countries like the U.S. who sell into large contracts in the area.

US manufacturing affected. US manufacturers, with billions of dollars in regional deals already on the books for 2011, are suddenly faced with a new uncertainty about sales and earnings. Many of these deals were set years ago and are simply still playing out. But whether contracts are new or legacy, the key to most of us is that broader US manufacturing indexes would be affected by any significant skips in the record.

Idealists sometimes say that Western nations should withdraw from providing arms / military fortitude to the Middle East entirely.  The point of the idea is understood by all, make no mistake. But it can’t work, because there is intense international competition for weapons dollars in the Middle East, and the market in every industry these days is in fact global.

Therefore, as the UK minister of defense equipment recently pointed out, simply withdrawing form markets is not an option because others will just fill the vacuum (AW&ST, Feb. 28, 2011).

Who’s buying and selling. The US and Russia are the top exporters of defense equipment to the Middle East market. Germany, France and the U.K. are in the second strata of providers.

On March 2, 2011, an article on msnbc.com noted that the outlook for US arm sales to Mideast region was murky. Amid unrest in the region, US seems unlikely to be pushing new arms deals, said the article.

Here are a few data points for perspective:

  1. In recent years, Arab countries and Israel have been big buyers of US warplanes, missile defense equipment and other equipment.
  2. Last September, the US announced another arms deal with Saudi Arabia that could be worth up to $60 billion
  3. From 2006-2009, the US signed arms transfer agreements worth $47.3 billion with Saudi Arabia, the United Arab Emirates, Egypt, Iraq and other countries in the region (Congressional Research Service via msnbc).
  4. In 2011, Egypt alone is expected to receive $1.3 billion in foreign military aid from the US.

There’s a lot of acquisition money coming from the region, specifically from the UAE followed by Saudi Arabia.

In one deal, the UAE bought 80 American-made F-16 fighter jets in late 2009, as recorded by the Washington Post. The UAE has long been negotiating the purchase of an estimated 60 French Rafale fighter jets, but Boeing and Lockheed haven’t been entirely ruled out of the deal. If we could bring those jobs and that payroll to our country, wouldn’t we?

But wait – there’s more: nuclear. It’s worth noting that the UAE, with US support, recently signed deals to build its first nuclear power reactors. Among other countries taking or considering similar steps are Egypt, Saudi Arabia, Turkey, Kuwait, Jordan and Yemen.  This is another equipment-sale opportunity to some.

This sort of equipment trading is yet another issue for the United Nations.

The UN meets towards improved arms treaty. On Feb. 28, the second round of negotiations to establish an international arms trade treaty (ATT) began at the United Nations headquarters in New York. These negotiations could not be timelier, according the the U.K. Guardian. Collective regulation would be good for national security, troops safety and the promotion of human rights, argue authors Jeremy Browne and Nick Harvey.

Some say that unrest in the Middle East is good for business in the long run, the thinking there is that if all were peaceful then there wouldn’t be billion dollar checks for defense/offense equipment.  That may be.

Bird’s eye view on manufacturing

However, as long as nations are poised to write billion dollar checks, any manufacturing company in the world wants to produce into those accounts. Given the nature of manufacturing and supply, demand and all the loopholes that exist for military manufacturing, it seems unlikely that any trade suppression or significant regulation would happen now.  The unrest in the Middle East, and any pause in spending as a result, may just be the Middle East market correcting itself for its relative extravagance of the past five years, suggested one analyst.

But more likely the pause is merely a short breath between notes of a long, familiar song.

Whatever happens in the Middle East over the next six months, these are key events on the global manufacturing and supply chain stage.  To the best of our ability we’ll alert you to critical turns here.

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