Guns and Gravity: Is There a Home‐Market Effect in the Global Arms Trade?

This paper examines whether the home‐market effect (HME)—a foundational prediction of trade theory—applies to the global arms trade. Using bilateral weapons trade data from 1950 to 2007 and building on the framework of Costinot et al. (2019), we construct a country‐year‐specific composite demand proxy to test for the presence of HME in the weapons industry. Our baseline and robustness results consistently show no evidence of a home‐market effect, either in its weak or strong form. Additional analyzes using alternative proxies, estimation methods, and data sources confirm this finding. However, we identify a weak HME during the Cold War period, suggesting structural differences before and after the dissolution of the Soviet Union. Further gravity estimations reveal that arms trade flows are shaped more by geopolitical factors—such as sanctions and alliances—than by domestic demand. Our findings highlight the unique nature of the global arms market compared to conventional industries.