This paper analyzes the impact of arms imports and exports on national military expenditures. Intuitively, one would expect that imports and exports both have a positive influence on expenditures. Rising imports are usually an indication of a perceived deterioration in a country's security environment, which leads to more military spending. An increase in exports, on the other hand, may indicate a strong domestic defence industry, which creates a high demand for government procurement. We empirically test these expectations for 161 countries from 1949 to 2012 using arms trade and military expenditure data provided by SIPRI. Employing static and dynamic panel data models, we find that exports have a negative impact on military outlays. This suggests that there is a substitution effect between domestic spending and arms exports. As a result, reductions in domestic military expenditures may increase international arms trade flows.
