Locked And Loaded; Wall Street is hot on weapons makers as developing nations bolster their defenses.

Byline: Stephen Glain

It may be too soon to talk about a global arms race, but the shopping spree is on. Nations of the world are buying weapons at the fastest pace since the Soviet Union collapsed 16 years ago. In 2005, according to the latest U.S. government data, the value of signed weapons agreements reached $44.2 billion, up more than 43 percent since 2001 and more than at any time since the cold war ended in 1991, when the figure hovered in the $50 billion range. The global arms bazaar got even busier in late July, when the Bush administration announced it would offer some $20 billion in new weaponry for its Gulf allies, with the lion's share for Saudi Arabia. Largely unnoticed was that Riyadh, its eyes cast warily on rival Iran, already has $28 billion in arms purchases in the pipeline from European suppliers.

The implications are as big as the deals. While the U.S. spends more money on new weapons than all other nations combined, it is no longer doing so at the brisk pace it was in the first few years after 9/11. Meanwhile, a host of developing nations, wary of a post-Iraq global power void, are bolstering their own defenses. The result is that the world's top defense contractors are turning to the high-growth markets of the Middle East and Asia, where robust economies coexist with ancient and seemingly intractable animosities. As the competition for new deals heats up and prices go down, analysts say, a potentially destabilizing arms race is all but inevitable.

Yet unlike during the cold war, when the U.S. and Soviet Union could regulate the quantity and lethality of the weapons they sold their client states, there is little the world's sole superpower can do to control this buildup. Not only is Washington bogged down militarily and diplomatically in Iraq, American arms makers no longer enjoy unchecked commercial clout. Since the cold war ended, their share of global arms exports has nearly halved, owing to challenges from rival producers in Western Europe, Russia and Asia. For now at least, America's big four defense contractors--Seattle's Boeing Co., Los Angeles-based Northrop Grumman Holdings Co., Raytheon Co. of Massachusetts, and Lockheed Martin--aren't hurting. They still dominate the United States' $100 billion procurement budget the way they once all but monopolized such overseas markets as South Korea and Saudi Arabia. So far, the growth in that market has offset the dip in others. Since 9/11 and the U.S.-led wars that followed, shares in American defense companies have outperformed both the Nasdaq and Standard & Poor's stock indices by some 40 percent. Prior to the recent cascade of stock prices worldwide, Boeing's share prices had tripled over the past five years while Raytheon's had doubled.

Business has been just as good on the other side of the pond. Absent a common threat like the old Soviet Union, European governments no longer feel pressured to "buy American" and over the years have been patronizing local companies like EADS, which in 2003 won a $25 billion mandate to develop a military-transport aircraft for the North Atlantic Treaty Organization. The enlargement of NATO in 1999 only deepened NATO Eurocentrism, as new members Hungary and the Czech Republic shunned U.S. fighter jets in favor of Anglo-Swedish made Gripen fighters.

But it is in the developing world where European contractors are really closing in on their American rivals. From 1992 to 2005, the U.S. share of the developing world's demand for weaponry declined from 54 percent to 29 per-cent. American arms producers have been losing ground most conspicuously in the Middle East, where defense spending has recovered along with record-high oil prices and where British, French and Chinese contractors are slowly replacing the U.S. as the dominant arms merchants.

The trend is most obvious in Saudi Arabia, America's oldest and most important Gulf ally. The desert kingdom has been distancing itself from Washington since 2000, when Israel's crackdown on the second Palestinian intifada turned the monarchy's close U.S. ties into a political liability, and the Europeans have eagerly filled the void. Even as U.S. lawmakers oppose the Bush administration's bid to include Saudi Arabia, a country linked to radical Islamic groups, in ...