Arms Race is broken at the moment in SR2030.
In SRU, it would work like this:
If toggled on, Arms Race caused your advisor to scrap units and immediately queue up a replacement. It only scraps them if it has a valid replacement in mind. The system would often not work if you were relatively low on funds.
In SR2030 it currently scraps units with no valid upgrade and does not replace them with a new unit in the build queue.
To Recreate it: I tested it on current fast-track, I toggled Arms Race as Japan in 1914 Brinkmanship start, it scrapped every last one of my infantry over the span of a month or two and didn't queue up a single new unit (There was no valid superior design to pick from even if it wanted to). The AI had full control of my army but no control over production, but this would not stop it queuing up replacements in SRU.
Tested a 2nd time but with AI having control of land production. Though the AI was busy making a lot of units it was a broad mix of multiple types and was often just rebuilding units it wanted to scrap once they were built.
**What do I think is happening? **I suspect the Arms Race has been modified to use the refit option when a unit design has an upgrade unit available, but when this is not the case it is often just purging your entire army.