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ARMS TRADE RESOURCE CENTER REPORTS
- Welfare for Weapons Dealers: The Hidden Costs of the Arms Trade
For further
information: by William D. Hartung Acknowledgments
Table of Contents
I. Introduction: Corporate Welfare for Arms Merchants? II. Product Development: Taxpayer Financing of Weapons for Export III.
Uncle Sam, Arms Broker: The Role of U.S. Government Agencies
IV.
Brother Can You Spare a Billion?: Government Financing of Arms Exports
V. Exporting Jobs: Coproduction and Offset Agreements VI. Picking Winners and Losers: The Opportunity Costs of Arms Export Subsidies VII. Cashing In: The Arms Export Lobby's Campaign for More Subsidies VIII. Selling Out: National Security Versus Private Gain List of Tables
Table I: U.S. Government Funding and Personnel Devoted to Arms Export Promotion, F.Y. 1995 Table II: Costs of Pentagon Participation in Air Shows and Weapons Exhibitions, 1994/95 Table III: Direct and Indirect U.S. Government Financing of Arms Exports, F.Y. 1995/96 Table VI: Top 15 Foreign Military Sales Contractors, F.Y. 1993 and 1994
Summary
of Findings I. Pumping
up Corporate Welfare for Arms Merchants The costs of arms export subsidies are likely to increase further over the next few years as a result of Congressional action that will establish a new, 15 billion dollar government-backed arms export loan guarantee fund; and an initiative to repeal hundreds of millions of dollars worth of annual fees on arms exports that were designed to reimburse the U.S. Treasury for the taxpayer funds that go into researching and developing U.S. weaponry. See Table A, below, for a breakdown of current federal subsidies for arms exports. II. Uncle
Sam, Arms Broker -- The Role of Government Agencies in Promoting
Arms Sales
Of even greater importance than the numbers of personnel involved in promoting arms sales is the pervasive pro-export attitude that prevails at the key Executive Branch agencies that are supposed to be keeping a close eye on U.S. arms exporting firms. The Pentagon actually receives a 3% cut on every foreign arms sale it negotiates, giving it a strong financial incentive to push exports that may or may not make sense on security or foreign policy grounds. The State Department now maintains a policy under which personnel stationed at foreign embassies are graded for potential promotions in part based on how much assistance they provide to U.S. arms companies in their efforts to make export sales. State also holds regular meetings with representatives of major arms exporting firms to give them input into the development of arms export policies. In addition, it publishes Defense Trade News, a "user friendly" newsletter to help weapons exporters cut red tape and get their sales licenses processed more quickly. At Commerce, promoting U.S. weapons exports has become a top priority on overseas trade missions, and the department has developed a new program of "defense trade advocacy" on behalf of U.S. firms that includes everything from going to bat for defense exporting firms within the counsels of the U.S. government to publishing detailed defense market assessments of key regions like Europe and Asia at taxpayer expense. Last but not least, top officials of the Clinton Administration have made pushing arms part of their official duties. Whether it is President Clinton pressing the Dutch Prime Minister to buy U.S. attack helicopters over lunch at the White House, or Secretary of Defense William Perry giving a press conference to promote U.S. arms exports from the deck of a naval frigate parked in the harbor near the annual defense exhibition in the United Arab Emirates, Clinton administration officials have been working overtime to help U.S. weapons firms "close the deal" on foreign sales. III. Increasing
Subsidies, Diminishing Returns The post-Gulf War arms sales boom has peaked. Many of the largest cash paying customers such as Saudi Arabia and the Persian Gulf sheikdoms are taking a break from multibillion dollar megadeals in the hopes of getting their financial houses in better order. With demand constrained and U.S. firms already controlling a lion's share of the world market, the only way to diminish the taxpayer share of U.S. arms sales costs is for Congress to acknowledge that selling weaponry is a dead end economically, and to cut government subsidies for weapons exports. IV. Offsetting
Costs, Exporting Jobs Because most governments have a hard time justifying purchases of fighter planes at $25 million per copy or tanks at $1 million each, they demand something in return: jobs, technology transfer, production facilities, and other economic incentives to buy U.S. weaponry that fall under the general heading of "offsets." In some recent deals, the value of the offsets offered to the purchasing nation has exceeded the total value of the arms sale. For example, a $1 billion sale of McDonnell Douglas Apache helicopters to the Netherlands that was sealed with a personal lobbying effort by President Clinton involves offsets of 150%. If McDonnell Douglas meets its commitment, it will have to generate $1.5 billion in new business for the Netherlands in exchange for its $1 billion arms purchase. Much of the business steered to the Netherlands will come at the expense of U.S. firms. Lockheed Martin's F-16 fighter program provides a case study of how modern arms deals can be structured in a way that actually exports jobs and production facilities from the United States to the purchasing nations. As a result of offset and coproduction deals tied to F-16 exports going back to the mid-1970s, parts of the aircraft are now being produced in Belgium, Denmark, Holland, Norway, Turkey, Japan, Singapore, South Korea, Taiwan, and Israel. Despite ex-President Bush's 1992 election year deal to sell 150 F-16s to Taiwan as a way to preserve defense jobs at Lockheed Martin's Fort Worth, Texas, production facility, the number of employees working on the F-16 at Fort Worth has actually dropped to less than one-third of the number of people employed building the aircraft in September 1992, from more than 3,600 then to only 1,155 now. V. Militarizing
Foreign Aid -- Fueling Political and Economic Instability VI. Promoting
Alternatives: Developing New Export Markets and Investing in America
Instead of pouring more government subsidy money into a diminishing market for arms that is already dominated by U.S. firms, U.S. government policy and resources should be focused on helping U.S. firms capture a greater share of key civilian markets. A first step in this direction would be to promote restraint on arms sales and military spending in the developing world, thereby increasing the prospects for economic growth in those nations and stimulating potential new markets for U.S. firms. The International Monetary Fund has determined that a 20% cut in global military spending could stimulate new consumer markets worth at least $190 billion per year, a figure five times the size of the current international market for arms. Given the right support, U.S. firms could win a substantial share of this new business. The alternatives cited here are illustrative examples designed to underscore the opportunity costs of subsidizing arms exports at the expense of domestic investments; there are many other tradeoffs that could be made, if reductions in arms export subsidies were put on the table in the federal budget negotiations. VII. Cashing
In -- The Military Industry Lobby
The increases in arms export subsidies documented in this report did not happen by accident -- they were the fruits of a concerted seven year lobbying campaign orchestrated by U.S. arms manufacturing firms, their trade associations, and their top executives, in conjunction with key allies in Congress. Three prominent individuals were at the center of this campaign: Norman Augustine, the President and CEO of Lockheed Martin (the nation's largest defense contractor), who has been lobbying since at least 1988 to get special treatment for weapons exporting companies, in his dual roles as Chairman of the Defense Policy Advisory Committee on Trade (DPACT), an industry advisory panel that provides confidential guidance to the Secretary of Defense, and as a leading member of the Aerospace Industries Association, the defense industry's largest trade association; Sen. Dirk Kempthorne (R-ID), the Senate sponsor of the industry's prized arms export loan guarantee legislation, who spent several years working as a Vice President for Governmental Affairs at the FMC Corporation, one of the nation's largest arms exporting companies; and Sen. Christopher Dodd (D-CT), the chairman of the Democratic Party, who has won special legislative exemptions to allow his home state company, Sikorsky Helicopter, to sell Black Hawk helicopters to Turkey using financing from the U.S. Export-Import Bank. The weapons industry's pork barrel economic arguments and skillful use of inside contacts with Executive Branch decisionmakers was reinforced by bushels full of political contributions, as noted above (figures are drawn from data compiled by the nonpartisan Center for Responsive Politics). IX. Selling
Out -- Commercial Motives Undermine U.S. Security
I.
Introduction: Corporate Welfare for Arms Merchants? Whether a program is wasteful corporate welfare or a useful public investment is to some extent in the eye of the beholder. Supporters of federal aid to business may be able to make a case for specific programs. So far, that case has not been made for most forms of business assistance, and neither the Clinton Administration nor the Congress has adequately scrutinized the full range of subsidies to business to determine which ones might safely be reduced or eliminated to make way for other more important priorities. This report examines a large and growing component of federal support for private corporations: the billions of dollars in government expenditures devoted to subsidizing exports of U.S. weaponry. Although these subsidies have been targeted in reports on corporate welfare issued by both the Cato Institute and the Progressive Policy Institute, the scale of government funding involved has been significantly understated, and to date there has been no detailed analysis of whether these expenditures are justified.[3] This report intends to provide that analysis. The embarrassing spectacle of the 1991 Persian Gulf War -- in which many of the major participants in the anti-Iraq coalition faced their own weapons which had been supplied to Saddam Hussein's forces prior to the conflict -- spawned an outpouring of reassuring governmental promises to bring the arms trade under stricter international controls. Unfortunately, governmental leaders from Washington to London to Paris to Moscow have repeatedly violated their post-Gulf War pledges to rein in the weapons trade. In the United States, strategic reasons such as promoting "interoperability" with allies (the ability to carry out joint military operations more easily by using common equipment), securing access to overseas military facilities, and fostering "coalition partnerships" with nations situated in critical regions have been cited in defense of the wave of arms transfers to the Middle East and Asia that have made a mockery of the nascent arms transfer control efforts of the post-Gulf War period. Strategic arguments notwithstanding, it has become increasingly clear that economic factors have been the real driving force behind both the pace of U.S. sales and the accelerating level of U.S. government involvement in promoting these dangerous exports. While economic arguments have been advanced to support arms exports and security assistance programs since at least the 1960s, they have emerged with particular force under the Clinton Administration. For example, the Congressional Presentation for Security Assistance for F.Y. 1994, which was forwarded to Congress during the first few months of the Clinton Administration, included a special section on "domestic economic impact" which succinctly summarized the major defense industrial base arguments in favor of arms sales: Security assistance programs have a direct and positive impact upon our economy . . . These result in economies of scale (i.e., longer production runs) which reduce the costs of weapons systems of continued interest to our armed forces. In fact, the continuation of a number of DoD production lines depends on foreign sales. These production lines constitute part of DoD's mobilization base in the event the U.S. must respond quickly to a military conflict. As the lines close, our ability to mount or sustain a rapid response will decrease.[4] This economic emphasis was dramatically reinforced when the Clinton Administration released its arms sales policy directive, P.D. 34, in February 1995. That document represented the first time that an essentially economic consideration -- the impact of an arms sale on the defense industrial base -- was put forward as one of the official criteria that would be considered in governmental deliberations over which exports to approve.[5] As important as they may be, these somewhat arcane industrial base concerns are far removed from the broader public debate on the economic impacts of arms sales. From the point of view of the average citizen (or member of Congress, for that matter), the only relevant economic issue raised by arms sales is the extent to which they create or sustain well-paying jobs in the United States. The arms industry lobby has answered this question with a resounding "yes," and most public officials, from members of Congress on up to presidential candidates, have accepted that assertion at face value. The 1992 election campaign between George Bush and Bill Clinton was a case study in the power of economic arguments to fuel questionable arms sales. President Bush announced an astounding $20 billion in new foreign arms sales at the height of the campaign, including an offer of 72 F-15s to Saudi Arabia and 150 F-16s to Taiwan. To make sure no one missed the point that the sales were being made to create jobs and win votes in key battleground states, each of the deals was announced at a campaign-style rally in front of crowds of cheering workers at the production sites of the two planes, in St. Louis, Missouri (for the F-15) and Fort Worth, Texas (for the F-16). The economic roots of the decisions were clear as well: the F-15 offer came on the heels of a year long lobbying campaign orchestrated by McDonnell Douglas under the slogan "U.S. Jobs Now." The F-16 deal was prompted by pressure put on the Bush White House by a bipartisan grouping of Texas elected officials, including Republican Representative Joe Barton and Democratic Senator Lloyd Bentsen, who went on to serve as President Clinton's first Secretary of the Treasury. As will be discussed later in this report, the jobs impact of these two deals turned out to be much smaller than originally advertised (see section V, below).[6] What are the true economic impacts of U.S. arms sales, and what role should economic considerations play in determining which weaponry the United States sells to which nations? Are taxpayer funds devoted to "security assistance" and "defense export promotion" good investments in the future security and prosperity of the United States, or are they wasteful corporate welfare payments that should be drastically cut back in the name of fiscal responsibility and budgetary fairness? In addressing these questions, this report will document the levels of U.S. taxpayer dollars devoted to subsidizing weapons exports; examine the extent to which U.S. arms manufacturing firms have moved jobs and production facilities overseas as a way of sweetening the deal for their foreign clients; outline the state of the current world market for arms to determine the extent to which it may be a dead end market with diminishing economic returns; and profile the role of the military industry lobby in sustaining and expanding the levels of subsidies afforded to weapons exporting firms by the federal government.
II.
Product Development: Taxpayer Financing of Weapons for Export
The U.S. defense industry is one of the most heavily subsidized industries in the world. From the beginning of the Reagan military buildup in 1981 through the end of the most recent fiscal year in September of 1995, the U.S. government spent more than $1.4 trillion to research, develop, and purchase weapons systems for U.S. military forces. The vast majority of these funds -- which exclude an equal or greater sum spent on the military personnel, supplies, and infrastructure needed to maintain and operate these weapons systems -- were given to private companies like Lockheed Martin, Northrop Grumman, McDonnell Douglas and the thousands of smaller firms that make up the U.S. military industry. Many of the top firms in the industry derive as much as 75 to 80 percent of their revenues from Pentagon contracts, making them virtual wards of the state, dependent on governmental largesse for their very survival. No one expects private defense firms to give advanced military systems to the Pentagon for free, so the costs of buying finished weapons for U.S. forces should not be considered a subsidy per se. However, the government funds spent on research, development, test, and evaluation (RDT&E) do represent a direct taxpayer subsidy to industry, since they allow private companies to design and perfect advanced weaponry with a minimal investment of their own funds, and then turn around and sell that same weaponry for profit on the world market. Since 1981, taxpayers have provided U.S. military contractors with over $450 billion in RDT&E funding to develop scores of new weapons systems, the majority of which have gone on to be exported to foreign nations.[8] This massive public investment in these companies and the weapons systems they produce gives them a tremendous advantage when the firms go out to sell their wares on the world market: their products have already been researched, built, tested, and in some cases utilized in combat at little or no cost to the company, putting them in a position to reap windfall profits on foreign sales of these same weapon systems. No other government in the world provides anything approaching the levels of support to its arms manufacturing firms that U.S. companies receive: for example, annual U.S. government R&D funding for the development of new weapons systems is five times the total amount spent by all of our Western European allies combined, a group that includes such major arms exporting nations as France, Britain, and Germany.[9] Lawrence Korb of the Brookings Institution, who served as a top Pentagon official in the Reagan Administration, notes that because of these factors "the foreign sales are all gravy for the industry. Exports look like a small part of the overall industry, but they are a very high concentration of the profits."[10] Until recently, the U.S. Treasury received at least partial reimbursement when U.S. companies made sales of taxpayer-financed equipment to foreign governments, through a sort of tax on foreign sales known as a "recoupment fee." The idea behind the fee was to recoup a portion of the original taxpayer investment in research and development for U.S. weapons that are now being sold for private profit on the world market by charging the client nation a fee worth anywhere from 5% to 25% of the total purchase price. The percentage of the fee varies based on the cost of the original system and the numbers being sold, with the revenues brought into the Treasury averaging roughly $200 million per year over the past two years. The arms industry has been campaigning to repeal recoupment fees for years, based on the argument that they discourage potential buyers from purchasing U.S. systems by pricing them out of the market. This is a hard argument to sustain when one considers that during this decade U.S. arms exporters have been selling more weaponry to foreign clients than every other nation in the world combined, but the industry has been successful nonetheless. The progress of the campaign to roll back recoupment fees will be described in detail below, in section IV. To give some sense of how significant government R&D support can be to a firm like McDonnell Douglas or Lockheed Martin in helping it launch major export programs for sophisticated systems like the F-15 and F-16 fighters, it is useful to take a look at how much taxpayer-financed R&D these highly lucrative export items have received over the years. From the mid-1970s through F.Y. 1995, U.S. taxpayers spent over $2.9 billion on R&D for the McDonnell Douglas F-15, and more than $1.8 billion on R&D for what is now the Lockheed Martin F-16 (the F-16 production line was owned by General Dynamics for most of this time period). These taxpayer funds allowed the two firms to conceive, design, and test the aircraft at minimal cost to the company bottom line, and then turn around and sell the aircraft for profit on the world market. While the F-15 has been involved in only a handful of deals involving the transfer of over 400 aircraft to Israel, Saudi Arabia, and Japan, the total value of the deals still exceeded $15 billion. In the case of the F-16, General Dynamics and Lockheed Martin have profited handsomely from overseas sales of 1,371 aircraft to eighteen nations, with a total value well in excess of $34 billion.[11] Once a major weapons system like the F-16 has been developed at taxpayer expense, weapons manufacturers like Lockheed Martin expect the government to expend additional resources helping them to secure foreign sales. As the next section will demonstrate, there is now an impressive sales force in place within the federal government that is ready and willing to help U.S. arms companies push their products overseas.
III.
Uncle Sam, Arms Broker: The Role of U.S. Government Agencies
and Personnel in Promoting Weapons Exports To understand the full costs to the taxpayer of subsidizing arms exports, we have to start by outlining all the ways in which the federal government is involved in helping private military firms to sell their wares in overseas markets. In the first instance, this means analyzing what U.S. government personnel do to help arms exporting firms, which is the focus of this section. In the next section, we address the U.S. government role in financing weapons exports. In recent years, the United States government has made an impressive (and growing) commitment of personnel and resources to arms export promotion. In F.Y. 1995, the federal government spent over $477 million on arms export promotion, and there were nearly 6,500 full-time equivalent personnel in the federal bureaucracy engaged in advertising, brokering, and servicing foreign arms sales (see Table I, below). These activities redound directly to the financial benefit of U.S. weapons exporting companies, who would otherwise be forced to carry out these arms sales marketing and servicing activities out of their own revenues.
As will be demonstrated in the agency by agency summary of arms export promotional activities that follows, these estimates represent a conservative accounting of the full resources that the United States government now puts at the disposal of U.S. weapons manufacturers in their relentless pursuit of an ever higher share of the international arms market. And the arms export promotion budget in turn represents only a fraction of the much larger expenditure of taxpayer funds that is devoted to financing foreign arms sales. DSAA: The Pentagon's Arms Sales Agency The biggest governmental player in the arms export business is the Department of Defense. Through its Defense Security Assistance Agency (DSAA), the Pentagon is responsible for administering the nation's largest single arms sales program, the Foreign Military Sales (FMS) program. The FMS program is a government-to-government arms program which is the principal channel for sales of major defense equipment such as tanks, fighter planes, advanced combat helicopters, and high tech missile systems. On average, 75% of all U.S. arms sales go via the FMS channel each year, with the rest going as commercial sales licensed by the State Department (see the next section for a discussion of the State Department's role). Working out of U.S. military training missions and Security Assistance Offices based at U.S. embassies in 74 different countries, Pentagon personnel and members of the three military services are responsible for liaison with foreign military officials on arms sales issues. Their responsibilities can include everything from scheduling technical briefings on a particular U.S. system, to arranging demonstration flights of major military aircraft for prospective buyers, to writing the actual assessments that allied military forces use to decide what kinds and levels of equipment they need to import. All these activities precede any actual request for a particular U.S. weapon system by the foreign government in question, and it is during this phase of the process that U.S. government personnel can often be most helpful in convincing the potential arms purchaser to "buy American." Once the customer has expressed an interest in a particular system, the DSAA and its counterparts in the Army, Navy, and Air Force typically negotiate a Letter of Offer and Acceptance (LOA) which sets out the terms of the deal. The cost, the number of items, provision of spare parts and associated weapons systems, training and support services, payment schedule and financing are all part of this negotiation. Services, spares, and training are often more lucrative than the underlying system they are supporting. That explains why the United States can sell 72 F-15s to Saudi Arabia for $9 billion, even though the cost of the planes alone (at $40 to $50 million each) would add up to "only" $3 to $3.5 billion.[13] For allies that have "sticker shock" and can't afford these intimidating prices, the Pentagon can provide aid through its Foreign Military Financing (FMF) program in the form of grants and subsidized loans (the amounts involved will be discussed below). After a deal has been struck and Congress has signed off on it, DSAA continues to service the customer by collecting payments and forwarding them to the appropriate U.S. contractors, ironing out any snags in the agreement, overseeing delivery of the finished weapons system, and coordinating provision of spare parts and any further training and support services that may be needed. In short, the Defense Security Assistance Agency is the Pentagon's one stop, full service arms dealer. This is a costly undertaking, involving thousands of personnel and hundreds of millions of dollars in annual funding. On the funding front, the agency had a total administrative budget of $373.1 million for F.Y. 1995, of which $351 million involved work on the Foreign Military Sales program and $22.1 million was allocated for running the Foreign Military Financing program. In addition, the Army, Navy, and Air Force provided approximately $71 million in support of DSAA's activities in the form of personnel assigned to Foreign Military Sales and security assistance projects, for a grand total of $444 million in administrative costs devoted to promoting and implementing U.S. arms sales.[14] DSAA officials are quick to point out that most of their budget is funded from the Department of Defense's Foreign Military Sales Trust Fund, using the proceeds of a 3% administrative fee that is attached to all major FMS sales. Because these fees are paid by foreign customers rather than being drawn from general budget revenues, supporters of DSAA argue that the agency is virtually "self-financing," placing very little direct burden on U.S. taxpayers. The self-financing argument is flawed in a number of respects. First of all, the foreign fees don't cover all of the Pentagon's costs for work on FMS and security assistance matters. For F.Y. 1995, the fees covered an estimated $335 million out of the $444 million in administrative expenses incurred by the Pentagon and the services in arms sales-related activities, leaving a still substantial net cost to taxpayers of $109 million.[15] At a time of tremendous budgetary stringency, it is legitimate to question whether the 3% fee charged to foreign arms customers should be earmarked to support DSAA as opposed to other possible uses, such as reducing the deficit by reimbursing the Treasury for a portion of the cost of researching, developing, and producing the weapons that are sold by private U.S. firms under the FMS program (for more on this point, see the section on "recoupment fees," below). Furthermore, it can be argued that tying the budget of the DSAA to the volume of Foreign Military Sales agreements concluded by the United States over a given time period gives the agency an institutional incentive to push more arms sales as a way to keep its budget flush with cash. This self-interest in promoting big deals contradicts the need to carefully scrutinize the military and foreign policy implications of arms sales before going ahead with them. In its 1991 study, Global Arms Trade: Commerce in Advanced Military Technology and Weapons, the Office of Technology Assessment underscored this very point, and made a sensible recommendation for reforming the way DSAA is financed: Because the operating budget of the agency is tied to the volume of weapons transferred, there is a powerful incentive for DSAA personnel to make as many sales as possible . . . Congress could reduce or eliminate DSAA's self-financing mechanism, thus reducing the incentive to maximize sales. At the same time, it would force the DSAA's operating budget to come out of general revenues, increasing Congressional visibility and control over the agency's activities.[16] [emphasis added] Estimating how many Pentagon and military personnel are involved in arms export promotion is an imprecise science, but officials familiar with the DoD's work in this area have generally estimated that 15,000 to 20,000 individuals in the Pentagon and the military services do some work on the promotion or implementation of arms sales. However, since many of these people also carry out other tasks and responsibilities, it is useful to look at another measure as well, full-time equivalent employees (FTE's) or work years of effort. This measure adds up all the hours devoted to a specific activity and calculates how many full-time employees it would take to do that work (based on a 40 hour work week). For F.Y. 1995, the Army, Navy, Air Force and DSAA combined employed the equivalent of 6,395 full-time staff people to administer and implement U.S. arms sales. This represents a 7.5% increase in the number of personnel devoted to these activities since the Clinton Administration took office, up from 5,945 employees in F.Y. 1993. This is in part a reflection of the Clinton Administration's increased emphasis on promoting arms exports, and in part a natural consequence of the demands involved in following up on the growing volume of FMS deals concluded since the Persian Gulf conflict.[17] DPACT: Industry's Inside Track to Shaping Arms Export Policy
In addition to the direct arms export promotional services provided to industry by the Pentagon described thus far, prominent defense industry executives have a permanent "open door" into Executive Branch arms transfer policy making circles through the Defense Policy Advisory Committee on Trade (DPACT), an advisory committee that was first established in 1975 to provide confidential recommendations to the Secretary of Defense and the U.S. Trade Representative on export policy. The committee's most recent membership roster, as of November 1995, included the Presidents and CEO's of major defense contractors such as DPACT Chairman Norman Augustine of Lockheed Martin, Kent Kresa of Northrop Grumman, John F. McDonnell of McDonnell Douglas, and Frank Shrontz of Boeing. The cost to the taxpayer of the committee's operations is estimated at $10,000 per year, which allegedly represents the cost of staff time the Pentagon devotes to administering the committee, organizing meetings, and providing space and supplies. Pentagon officials claim that committee members receive no per diems or travel expense reimbursements for participating in DPACT, which may well be true: for the CEO's of major defense firms like Lockheed Martin and Northrop Grumman the value of helping shape government policy on issues of direct financial interest to their companies is probably well worth the cost of a few annual trips to Washington. Although DPACT's recommendations are carefully protected from public view, every once in a while a published accounting is released that gives a flavor of the kind of advice the industry has been providing the Pentagon on arms export policy issues behind closed doors. For example, in November 1988, during the transition period between the Reagan and Bush administrations, the committee released a report suggesting various reforms in arms export policy. The report was a virtual industry wish list of changes designed to facilitate arms exports, from quicker processing of major sales, to reduction of "recoupment fees" and other governmental charges attached to major FMS deals, to the establishment of a separate arms export loan guarantee fund over and above the Pentagon's existing Foreign Military Financing programs, to making support for U.S. arms exports "a major element in the job description and a significant factor in the evaluation of overall job performance" of personnel serving at U.S. overseas embassies. DPACT has had an impressive track record at getting its recommendations translated into new laws and regulations governing arms exports. DPACT's proposal to offer incentives for embassy personnel to promote arms sales was embraced by the Bush Administration. Its recommendations on the establishment of the arms export loan guarantee fund and the abolition of recoupment fees were more controversial, involving as they did billions of dollars in potential taxpayer exposure, but they too were passed into law in 1995, seven years after DPACT originally proposed them. The issue raised by DPACT's role in arms export policy is not so much the $10,000 or more that the Pentagon spends administering the program, which is minimal; the real question is whether taxpayers can afford to have an unaccountable body of arms industry executives provided with an officially sanctioned inside track on the formulation of policy changes that benefit that industry to the tune of hundreds of millions or even billions of dollars per year (for further discussion of DPACT's role in shaping arms export policies, see section VI, below).[18] The Bottom Line (Pentagon administrative costs): The Pentagon and the military services utilized the equivalent of 6,395 full-time employees and spent more than $444 million in F.Y. 1995 promoting U.S. arms sales. This represents just the department's personnel and administrative costs involved in promoting and supporting arms sales; expenditures on special activities like sending personnel to international air and trade shows account for tens of millions of dollars in additional expenditures, and Pentagon administered military assistance under the Foreign Military Financing program runs into billions of dollars more (see discussion of each of these items below).
The
State Department: Promoting "Defense Trade" Based on these legislative principles, one might assume that the State Department would be the principal voice for arms transfer restraint within the federal government, but the reality is far more complicated. Given appropriate presidential leadership, the Department of State can be an important force for arms transfer control, but a combination of mixed signals from the White House and conflicting bureaucratic imperatives within the Department have worked to undermine its ability to fulfil this aspect of its mission. Promising initiatives can be cut short as a result of abrupt policy shifts, as happened when the Carter Administration abandoned the Conventional Arms Transfer (CAT) talks with the Soviet Union in 1978. Ambassadors and desk officers assigned to deal with specific countries may become advocates of arms sales to those countries as a way to maintain good relations with the governments in question. And the desire to use arms sales to cement political alliances with key states can frequently override concerns about the wisdom of arming human rights abusers or undemocratic regimes. As a result of these countervailing pressures, the State Department has a split personality when it comes to arms sales, with some elements of the agency promoting restraint on arms control and human rights grounds while others support weapons exports as a way to win friends and expand commercial ties with key nations. The bulk of State's arms transfer-related work occurs within the Bureau of Politico-Military Affairs, which employed 278 full-time equivalent employees at a cost of $24.6 million during Fiscal Year 1995. The two budget lines within the Bureau that deal most directly with arms sales issues are Regional Affairs and Defense Trade and Policy Controls, which together account for over one-third of the Bureau's annual budget ($9.1 million out of $24.6 million in F.Y. 1995) and nearly one-half of the Bureau's total personnel (130 out of 269 full-time personnel). Regional Affairs helps to negotiate access for U.S. military forces to overseas basing facilities (a process that often involves offers of U.S. arms as a quid pro quo) and it also "manages the Department's statutory responsibilities for programs by which the United States provides defense articles, military training, and other defense related services, by grant, credit, cash sale, lease, or loan, in furtherance of national policies and objectives." Defense Trade and Policy Controls "sets policy guidelines for commercial defense trade and high technology exports, and provides guidance to embassies on assistance to defense industry marketing efforts overseas." It also "issues export licenses to U.S. firms and enforces compliance in accordance with the Arms Export Control Act." Whether these functions represent arms export promotion or arms export control and administration depends in large part on the spirit in which they are carried out. In recent years, there has been a sharp shift with the State Department towards emphasis on arms trade promotion and away from its traditional arms transfer control functions; because of this new emphasis, most of the $9 million spent on Regional Affairs and Defense Trade and Policy Controls may be considered a subsidy to arms exporters. Whether these funds should be cut from the budget or just reoriented to beef up arms export control and administration is an important policy question. But for purposes of accounting for current subsidies, at least one-half of these budgets should be included, as is demonstrated by the following analysis of how the Department has been carrying out these functions in recent years.[20] The contradictory nature of the State Department's role in the arms sales decisionmaking process was driven home with a vengeance during the Bush Administration when Undersecretary of State Lawrence Eagleburger adopted a reorganization plan touted by the Aerospace Industries Association (a major arms industry lobbying group) by creating a Center for Defense Trade within the department. The Center brought together the two sides of the department's work on arms transfers under one roof. On the control side, the Center incorporated the Office of Munitions Control, which is responsible for reviewing and ruling on 40,000 to 50,000 annual requests from U.S. weapons manufacturers and arms dealers for licenses to market or transfer U.S. weapons systems to foreign countries. These licenses are part of the commercial sales program, which is the second largest channel for the transfer of U.S. weaponry after the Pentagon's Foreign Military Sales program, accounting for an average of 25% of all U.S. arms transfers per year. The commercial sales program covers all items designated as weapons based on their inclusion on the U.S. Munitions List, with the exception that certain items of major defense equipment that involve either major U.S. government investments in R&D and procurement or the inclusion of classified components may be required to go through FMS channels (unless they are going to close allies, in which case the FMS requirement can be waived). For the most recent ten year period, U.S. commercial arms sales have ranged between $1.7 billion and $8.4 billion per year, which means that the State Department's licensing decisions on these exports are of considerable financial interest to weapons trading companies.[21] Because industry has so much riding on commercial sales, arms company representatives were among the strongest advocates of "modernization" of the Office of Munitions Control. When the Bush Administration's reorganization plan took effect, OMC was already in the process of receiving increased funding to upgrade its antiquated system for reviewing arms export licenses (which had yet to be computerized), and to increase the number of staff members devoted to reviewing these important applications from 4 full-time employees to 20. Building on the findings from hearings on the OMC held by Sen. David Pryor (D-AR), arms control advocates had pressed for additional resources as well, arguing that four employees were simply not sufficient to undertake a serious review of even a small fraction of the tens of thousands of annual licensing requests that pass through the agency. Industry's interests were somewhat different. They just wanted their licenses to move through the process more quickly, and they argued that OMC's backward state prevented that from happening. The Eagleburger plan took full account of industry's concerns, even going so far as to accede to a longstanding industry request to remove the word "munitions" from the agency's title, changing it from the Office of Munitions Control to the Office of Defense Trade Controls. To top it off, the trade controls office was incorporated into a larger body called the Center for Defense Trade, signaling clearly that arms export promotion was to predominate over the arms export control function of the State Department. This new emphasis was underscored in the Center for Defense Trade's quarterly newsletter, Defense Trade News, which is distributed to all licensed arms exporting companies in the United States. Typical articles in the first few issues tout the agency's "Fresh Start for the 90s," promising everything from "faster, more responsive licensing," to tips on how to get a company product shifted from the more restrictive munitions list administered by the State Department to the less restrictive commodity control list, a compilation of so-called "dual use" items with both military and civilian applications that is administered by the Department of Commerce. The lead article in the first issue summed up the attitude of the new agency when it asserted that "all of us at the Center for Defense Trade are eager to serve U.S. industry."[22] The most abrupt departure from previous practice that was initiated at the State Department as part of the Eagleburger reorganization plan was a move to explicitly encourage personnel at U.S. overseas embassies to lend a hand to U.S. companies seeking to market weapons in those nations. During the Carter Administration's short-lived policy of arms transfer restraint during the late 1970s, embassy personnel were discouraged from advocating the purchase of U.S. weaponry by foreign clients by the so-called "leprosy letter," a directive that required authorization from the State Department in Washington before undertaking any promotional activity on behalf of U.S. weapons manufacturers. The pro-arms sales Reagan Administration simply ignored these restrictions, while the Bush Administration replaced the Carter "leprosy letter" with explicit instructions to embassies to "be well informed about, and responsive to, U.S. defense industry sales interests in host countries." Charles Duelfer, who ran the State Department's Center for Defense Trade during the Bush Administration, took this requirement a step further in a Center newsletter that was distributed to hundreds of U.S. weapons exporting firms by announcing that when embassy personnel were considered for promotions, their helpfulness in promoting U.S. military exports would be "one of the things they'll be graded on." This shift in embassy employee "incentives" vis-a-vis promoting arms sales came as a direct result of recommendations made in a November 1988 report to the incoming Bush Administration by the Defense Policy Advisory Committee on Trade (DPACT), a confidential Pentagon advisory body composed of representatives of the nation's largest weapons exporting companies.[23] Although it has shuffled the bureaucratic deck a few times, under President Clinton the State Department has maintained the strong pro-export emphasis introduced during the Bush years. The Center for Defense Trade is no more, but its constituent parts remain. Under an initial reorganization implemented early in the Clinton term, the Center was sent down a bureaucratic black hole, to be replaced by two separate bodies, the Office of Defense Trade Controls and the Office of Export Control Policy, each of which reported to the Deputy Assistant Secretary of State for Export Controls, Martha Caldwell Harris. By late 1995, this new setup had been shifted yet again, with the Office of Export Control Policy renamed the Office of Arms Transfer and Export Control Policy (ATEP) and expanded to include additional arms export functions formerly handled by the Office of Defense Relations and Security Assistance. Whatever one chooses to call the Department's offices dealing with arms export reviews and arms export promotion, the same theme emerges: when in doubt, help industry sell its wares. The Bureau of Politico-Military Affairs continues to publish the Defense Trade News, and its "how may we help you?" approach to arms exporting companies remains intact. For example, the October 1995 edition of the newsletter contains a "message to industry" from the newly appointed Assistant Secretary of State for Politico-Military Affairs Thomas E. McNamara, in which he promises to "continue to make our policy-making and licensing processes more transparent and user-friendly." The "users" McNamara is referring to are not average citizens or independent analysts who may have concerns about the arms control or human rights impacts of U.S. arms sales, but rather the thousands of U.S. arms exporting firms that the agency views as its "clients." In line with this pro-industry emphasis, McNamara's bureau has devoted considerable energy to nurturing the Defense Trade Advisory Group (DTAG), which was created by President Bush to provide yet another avenue (along with DPACT, discussed above) for industry to put its stamp on U.S. government policies governing arms exports.[24] DTAG: Industry's Voice at the State Department
The Defense Trade Advisory Group was established by the Bush Administration on February 28, 1992 to "advise the [State] Department's Bureau of Political-Military Affairs on its support for and regulation of commercial defense trade, helping to ensure that impediments to legitimate exports are reduced while foreign policy and national security interests are protected and advanced." In practice, DTAG has focused almost entirely on eliminating "impediments to exports" with little or no attention to long-term foreign policy or national security interests. Although the costs of running DTAG are estimated by the State Department at less than $9,000 per year, the real question is whether the public can afford to give the defense industry such a powerful vehicle for insinuating its views into the implementation of U.S. government policies on arms transfers.[25] DTAG's membership comes overwhelmingly from the ranks of arms exporting and weapons manufacturing firms. As of early 1996, 54 out of the 57 members of the group were executives at defense contracting firms. The group meets several times a year at the State Department, and it also has subcommittees that do ongoing work on specific export-related issues. The typical meeting involves discussions among industry representatives and top State Department officials on topics such as how to increase the U.S. market share for arms sales to regions such as Latin America and East and Central Europe, how to get specific dual use technologies (items with both civilian and military applications) such as communications satellites or supercomputers cleared for export to more destinations, and how to open up sales opportunities for weapons systems whose export has previously been prohibited (such as submarines). DTAG also organizes special projects on issues like defense export financing which are of particular interest to the industry, as well as soliciting industry input on overall policy goals. DTAG member organizations have fared extremely well in their dealings with the State Department's Office of Defense Trade Controls. A 1995 investigation conducted at the request of Sen. David Pryor (D-AR) revealed that during F.Y. 1992 and F.Y. 1993, 25 firms whose executives serve on DTAG had more than 15,000 arms export licenses cleared by the State Department. With this much business at stake, it is little wonder that DTAG members so often make policy recommendations that result in quicker licensing decisions and higher volumes of commercial arms exports. In a June 1995 letter to Undersecretary of State Lynn Davis, Senator Pryor questioned whether this narrow arms industry perspective provided by DTAG is in the nation's best interest: "in order to obtain 'fairly balanced' advice on U.S. arms export policies, that would seem to call for either a broadening of the DTAG to include persons critical of U.S. arms export policies or the formation of another advisory committee that will not have such a restrictive charter. I do not believe that the American public would agree that it is sufficient to be advised on arms export matters by representatives from companies receiving hundreds of export licenses."[26] As of this writing, Pryor's recommendation that State seek regular advisory input from non-industry sources has not been acted upon. When P.D. 34, the Clinton Administration's arms export policy directive, was released in February of 1995, it had a strong pro-industry tilt, even going so far as to explicitly argue that keeping weapons manufacturing plants up and running would now be an explicit goal of U.S. arms transfer decisionmaking. This result should not be surprising, given that representatives of the arms industry were given repeated input into the development of the new policy via closed door meetings sponsored by DTAG and a host of informal contacts between industry lobbyists and Clinton Administration officials. Arms control, human rights, and development organizations concerned with the impacts of U.S. arms sales were not afforded the same opportunity to make their views known to administration policymakers.[27] Bottom Line (State Department Administrative Costs): A conservative estimate of the levels of State Department resources and personnel devoted to arms export promotion is $4.5 million per year and 65 full-time equivalent personnel. This estimate is based on allocating roughly one-half of the $9 million and 130 positions devoted annually to Regional Affairs and Defense Trade and Policy Controls to arms export promotion. The estimate is conservative in that it doesn't attempt to assess the cost of embassy personnel on the State Department payroll who may engage in arms export promotion from time to time, nor does it attempt to fully cover the degree to which the entire Bureau of Political-Military Affairs may be involved in arms export promotion through its coordination of DTAG and its implementation of the Clinton Administration's extremely export-friendly arms transfer policy directive.
The
Commerce Department: Closing the Deal Exports of dual use items are handled by the Commerce Department's Bureau of Export Administration, which has drawn fire in recent years as the result of its approval of over $1.5 billion in military-related exports to Iraq during the period leading up to the Persian Gulf War of 1990-91, of which $500 million worth was delivered prior to the conflict. Congressional hearings and the Department's own documents have indicated that these exports made a significant contribution to Iraq's military manufacturing capabilities, showing up in military-related agencies such as the Iraqi Atomic Energy Agency and the Iraqi Air Force, not to mention numerous licenses for equipment shipped to Saad 16, Iraq's notorious ballistic missile production site located just south of Baghdad.[29] Requests to export any item on the Commodity Control List (CCL), which can include anything from unarmed helicopters and trucks to supercomputers, machine tools, and measuring instruments that may be used to test and manufacture weaponry, are referred to Commerce for review. In theory, exports that pose questions based on either the nature of the recipient nation (such as countries with a history of promoting terrorism or countries engaged in developing nuclear weapons) or the capabilities of the equipment involved (with particular emphasis on tools that can be used to produce weapons of mass destruction) are to receive more rigorous reviews, including seeking second opinions from the Pentagon and/or the Department of State. In the case of Iraq, Commerce Department representatives were enthusiastically encouraging U.S. companies to make deals with Iraq for everything from nuclear components to high temperature furnaces that one expert argued could have provided the basis for a "Cadillac production line for atomic bomb and ballistic missile parts" right up until the eve of Saddam Hussein's August 1990 invasion of Kuwait. In the case of the high temperature furnaces, which were produced by the New Jersey-based CONSARC Corporation, company officials had informed Commerce representatives of the military applications of their equipment and were told to go ahead with the sale anyway. It was only after details of the arrangement leaked to former Pentagon official Stephen Bryen that extraordinary efforts were made to persuade the Bush Administration to reconsider the wisdom of the sale; it was overturned by the National Security Council on July 25, 1990, roughly a week before Iraq's invasion of Kuwait, at which point the furnaces were already packed up and ready to be shipped to Iraq out of the port of Baltimore.[30] This close call is indicative of the Commerce Department's tendency to view dual use licensing decisions as opportunities to expand trade rather than sensitive export control matters with serious implications for regional and international security. Unfortunately, its recent activities have made it abundantly clear that Commerce officials have not learned their lesson from the Iraq fiasco. At the November 1995 Dubai Air Show in the United Arab Emirates, Sally Bath of Commerce's international trade administration defended the department's practice of approving sales of "civilian" versions of military helicopters to countries that might not otherwise be eligible to receive advanced weaponry from the United States. A case in point is a plan by Bell Helicopter to sell Pakistan commercial helicopters that can be readily converted to attack helicopters. Bell pursued this "dual use" option only after the State Department had denied the company a license to sell Pakistan the military version of the aircraft, citing legislative prohibitions on arming Pakistan because of the country's active development of nuclear weapons (those restrictions, embodied in the Pressler Amendment, have since been substantially loosened as a result of legislation supported by the Clinton Administration). When Bath was confronted with the question of why Commerce would help Pakistan get a capability it was meant to be denied under existing U.S. law, she gave a succinct synopsis of the Department's pro-export outlook: "Yes, we are aware of that [that the civilian helicopters for Pakistan can be easily modified for military use]. If the export license (for civilian helicopters) is granted it's legal. You can't deny Pakistan the ability to buy civilian helicopters. That's just cutting off your nose to spite your face . . . Commerce has worked very hard to expand these markets."[31] The dual use area is not the only sphere in which the Commerce Department is aggressively pushing the agenda of U.S. exporters. There are a number of departmental activities that are directly intended to expand what the U.S. government euphemistically refers to as "defense trade," the trade in finished weapons platforms. For example, the Department's Office of Strategic Industries, run by John Richards, spends $2.3 million per year and employs 33 full-time personnel helping U.S. defense firms market their wares on the world market. One of the Office's jobs is to serve as the lead organizing agency for U.S. government participation in international air shows and weapons exhibitions like the Paris and Dubai air shows (see more on air show policy in the next section). As Richards made clear in an interview with Boston Globe reporter Charles Sennott, he takes his defense export mission very seriously: "A few years ago, we realized that the U.S. (defense) industry was going to lose a great deal of business. We knew we had to capture a higher percentage of exports . . . But the heaviest focus on this strategy came when [the late Commerce]Secretary [Ron]Brown came in . . . Now, whenever Brown visits another country, we are asking him to meet with their secretaries of defense . . . We have to do everything we can."[32] During the Clinton Administration, the Commerce Department has positioned itself as a leverage point for weapons exporting firms, ready to help them bring the resources of Commerce and other federal agencies and officials to bear on behalf of particular sales. The Department's Office of Industrial Resource Administration (OIRA) (which forms a part of the Office of Strategic Industries headed by John Richards) has set up a special program of "defense trade advocacy" which gets behind specific exports once they have been cleared by the appropriate licensing authorities. The Office boasts that once it has adopted a particular arms sale it "generates high level support for the transfer and generates high level government-to-government advocacy on behalf of the U.S. firms involved in the overseas defense procurement." One example of this process was OIRA's work on behalf of the sale of a combat ship to the United Arab Emirates, which it recounts in the Commerce Department's annual report on export administration: "OIRA worked with DoD in the Excess Defense Articles program to the U.A.E. prior to the delivery of new frigates, thereby enhancing U.S. industry's competitiveness in the competition for the final sale of the frigates. The lease of the U.S. frigates effectively strengthened the follow-on Secretarial advocacy efforts."[33] In another Commerce publication on potential defense markets in Asia (discussed below), the department takes the concept of defense trade advocacy a step further, noting that through its Bureau of Export Administration "the agency . . . serves as industry ombudsman in the interagency community, interjecting economic and competitiveness considerations as well as overall industry concerns into U.S. arms transfer determinations."[34] In short, Commerce will promote defense exports not only overseas but also within the counsels of the U.S. government, by attempting to tip the scales in favor of controversial sales that may have downsides on human rights or arms control grounds by waving the banner of jobs, profits and economic competitiveness. Under the Clinton Administration, Commerce has also expanded its research and publishing efforts in the area of defense export promotion, most notably by inaugurating a series of "diversification and defense market assessments" for Europe, Asia, and other key trading regions. The Pacific Rim assessment, which was published in November of 1994, bears an introductory message from William A. Reinsch, the Undersecretary for Export Administration at Commerce, in which he asserts that the publication is meant to further the Clinton Administration's defense conversion program by providing "current market information on commercial as well as defense business opportunities abroad in order to assist U.S. firms in their market and product diversification efforts."[35] Properly understood, defense conversion is meant to be a process whereby weapons manufacturers put their equipment and personnel to work on civilian projects. By conflating diversification from defense to civilian products with the entirely different process of diversifying into new foreign markets while continuing to produce military items, the Commerce Department unwittingly acknowledges that it is less interested in genuine defense conversion than it is in expanding arms export markets for U.S. firms. To get a flavor of Commerce's defense market assessments, an example is in order. The Pacific Rim assessment includes a fifteen page analysis of how to do business in Indonesia, complete with an overview of the country's economic prospects, a forecast of defense needs (including lists of specific equipment being sought by the Indonesian military), and a guide to how to approach Indonesian officials. There is even a section on how to "identify an appropriate military products agent, often a retired military official." The report goes on to note that "selecting the right agent is a critically important step for the company, and assistance with preliminary selection can be provided by the US&FCS [Commerce's Foreign Commercial Service]."[36] The Pacific Rim market assessment makes it clear from the outset that Indonesia's abysmal human rights record, which includes a 20 year illegal military occupation of neighboring East Timor that has cost 200,000 lives, is of little consequence to the Commerce Department when weighed against the prospect of striking up a few deals to sell the Suharto regime U.S. defense equipment: "Instances of human rights abuses have given rise to concern in the U.S. from time-to-time, the most significant being the decision of Congress to suspend military training assistance in 1992, but the overall relationship provides opportunities for U.S. defense companies to benefit from the pace of economic growth and concomitant defense needs of the Armed Forces of the Republic of Indonesia."[37] Among the defense products that the Commerce Department encourages U.S. firms to promote to the Indonesian military are upgrades for the nation's U.S.-supplied F-5 fighters, additional F-16 fighters, and Huey and Black Hawk helicopters, each of which have a long history of being used in counterinsurgency missions and civil wars and could easily be put to use in future military campaigns against the East Timor independence movement. The section concludes with a list of U.S. and Indonesian government offices in Jakarta that may be contacted to help promote a particular weapons sale. Bottom line (Commerce Department): At a minimum, the Department of Commerce devoted $2.3 million in F.Y. 1995 to support the work of 33 full-time equivalent employees involved in significant arms export promotion activities within the Department's Office of Strategic Industries. Given that the Department also makes pitches for U.S. defense products on its numerous trade missions around the world, that Commerce is the lead organizing agency for U.S. involvement in international air shows and weapons exhibitions, and that other Commerce offices engage in promotional activities, the total dollar figure of Commerce-related subsidies to arms exporters is probably well beyond this conservative figure. Commerce's most important service to the arms export industry is intangible: its relentless "defense trade advocacy" directed not only at potential foreign customers but also at the U.S. arms transfer decisionmaking process, within which Commerce presses for deals on strictly commercial grounds without considering larger human rights or arms control concerns.
Bringing
Out the Big Guns: Air Shows and Advocacy by Cabinet Members One might have expected the major arms exporting nations to be somewhat circumspect in their marketing pitches at Paris, given that the show was following so closely on the heels of a war that was sparked in significant part by irresponsible arms trading practices that had not only prolonged the eight year long Iran-Iraq war (1980-1988) but had set the stage for Saddam Hussein's use of his imported arsenal to invade Kuwait in August of 1990. The reality of the show was quite the opposite. Howard Fish, a retired general and former head of the Pentagon's Defense Security Assistance Agency who had gone on to work as an arms sales lobbyist for the LTV Corporation, accurately predicted that the theme of the 1991 Paris Show would be "how our weapons won the Gulf War." No nation embraced this cynical theme more enthusiastically than the United States of America.[38] On March 6, 1991, on the very same day that President Bush assured a joint session of Congress that he would make Middle East arms control one of his top priorities to head off "a new arms race" in the Persian Gulf, Undersecretary of Defense Paul Wolfowitz was circulating a memo authorizing the Pentagon and the military services to come out in force to promote U.S. weapons sales at the upcoming Paris Air Show. And come out they did, emphasizing the "we won the Gulf War" angle at every opportunity, with U.S. taxpayers footing the bill. For the first time ever, the Army, Navy, and Air Force each ran their own exhibits in the U.S. pavilion at Le Bourget, the remodeled air field on the outskirts of Paris that serves as the permanent home for the Paris Air Show. The Air Force booth included a video display screen that showed footage of U.S. aircraft hitting their targets in Iraq, while the Navy proudly displayed the flags of the more than two dozen nations that had purchased naval combat systems from the United States. The U.S. pilots who stood alongside U.S. aircraft like the F-15 fighter and the Apache and Kiowa helicopters on the tarmac at Le Bourget were chosen specifically for their service in the Gulf War, so that they could regale onlookers with real life stories of how these aircraft performed in combat. Typically, the pilot would be teamed up with a representative of the company that manufactured the aircraft in question, so that interested customers could get details on price and delivery, or even schedule a test flight. In essence, the U.S. pilots who served in the Gulf were being loaned out to U.S. arms companies as sales representatives for the duration of the air show, providing far more compelling testimony on behalf of U.S. weaponry than any company marketing representative could possibly supply.[39] U.S. military and industry representatives at the 1991 Paris Show seemed to view the Pentagon's expanded role as a smashing success, but domestic critics weren't so sure. In addition to the fundamental question of whether uniformed U.S. military personnel should ever be used as arms salesman for private weapons manufacturers, critics in the Congress and the media questioned the costs of the Pentagon's impressive display in Paris. Prior to 1991, the federal government's approach to air shows had been to avoid direct military involvement and leave the basic organizing and promotional role to the Department of Commerce, which runs the U.S.-built pavilion at Le Bourget. Aircraft that were used for static displays on the tarmac or demonstration flights over the show were leased to U.S. companies by the Department of Defense; once the costs for insurance, ramp fees, transportation to and from the show, and the costs of paying any government personnel who might be needed to watch over the aircraft, lease costs had risen to as much as $500,000 to $1 million per plane. Under this traditional system, the 21 aircraft and 140-plus personnel deployed to Paris would normally have cost contractors more than $10 million. But when the Bush Administration pressed about the cost of letting the Pentagon assume a direct role in air show promotion, they admitted a total "marginal cost" to taxpayers of only $300,000 to $500,000 for the aircraft and personnel deployed to Le Bourget. This much lower figure factored out transportation costs by arguing that the planes flew to Paris on "training missions" that would have been undertaken in any case, and it also eliminated the high costs of insurance by letting the government assume the financial risk if anything went wrong with one of the planes. If an aircraft crashed going to or from an air show under the new "direct participation" policy, the cost would fall on the federal government, not the arms manufacturing firms that were displaying the system. As a result of this shift, taxpayers had to absorb the cost of an Marine AV-8B aircraft that crashed on its way back from a 1992 air show in Singapore, at a total price of $18.9 million.[40] Outraged by the spectacle of taxpayer-financed weapons promotion by U.S. military and civilian personnel at Paris, Rep. Howard Berman (D-CA), a longtime critic of unrestrained U.S. arms sales to the Middle East, passed an amendment limiting the government's ability to engage in similar displays at future air shows. Under Berman's amendment, the President was required to notify Congress 45 days in advance of any proposed military participation in an international air show or weapons exhibition. The notification was to include a certification that this involvement was in the national security interests of the United States and an estimate of what direct Pentagon involvement would cost.[41] When it was first passed into law, the Berman amendment appeared to be having the desired effect of slowing down the rush to use government funds for air show promotion. At the 1993 Paris Air Show, the Clinton Administration opted against direct Pentagon involvement, because, as a Pentagon spokesperson put it, the administration wanted to avoid the appearance of giving a "handout to industry" at a time when domestic programs were starting to be hit with serious budget cuts. However, as noted above, this step towards restraint was to a large extent canceled out by the relish with which Clinton Secretary of Commerce Ron Brown took up his role as the president's official representative at the 1993 Paris show, even going so far as to tout specific U.S. weapons systems to the military delegations of France and Malaysia. Even so, on its initial test run, the Berman amendment seemed to have persuaded the Clinton Administration to limit the Pentagon's role in Paris, saving taxpayers hundreds of thousands if not millions of dollars in the process. But the arms industry wasn't going to take the new Clinton approach to air shows sitting down. Led by the Aerospace Industries Association, weapons manufacturers engaged in a concerted inside lobbying campaign to get the Pentagon back into the arms promotion business, and by the February 1994 Asian Aerospace Exhibition in Singapore the industry had won its point. Not only did the Pentagon participate directly at an estimated cost of more than $387,000, but a U.S. aircraft carrier was sent to Singapore on a so-called "training mission" during the time of the show, which allowed U.S. aircraft to do overflights of the air show site off the deck of the ship, not to mention putting the carrier's crew of nearly 5,000 personnel in close proximity to the show where they could informally fraternize with foreign defense officials and sing the praises of U.S. weaponry. The carrier stopover was not included in the official estimates provided to Congress on the costs of Pentagon participation in Asian Aerospace '94, even though it dwarfed the officially reported costs. By using the "training mission" rationale to slip an aircraft carrier into Singapore, the Clinton Administration violated the spirit -- if not the letter -- of the Berman amendment, by drastically under reporting both the extent and the cost of U.S. involvement in the exhibition. It was not the last time that this tactic would be employed. During 1994 and 1995 alone, the United States government was involved in helping to promote U.S. weaponry at over a dozen major international air and trade shows, from the big traditional shows in Paris and Farnborough, England, to the up and coming exhibitions such as the Dubai exhibition (held smack in the middle of the Persian Gulf, in the United Arab Emirates). The Pentagon has acknowledged direct expenditures of more than $1.8 million dollars in support of these weapons shows, but the actual costs are at least twenty-six times that (see Table II, below). The unreported costs begin with the revenues foregone from leasing fees that are no longer charged to U.S. manufacturers to display U.S. government-owned weaponry at big shows like Paris, Farnborough, and Asian Aerospace. Since the U.S. government often provides ten to twenty aircraft for display at each show, these waived fees alone can cost taxpayers $5 to $10 million per show for major exhibitions. On top of the waived leasing fees, a full accounting of U.S. government expenditures on air shows must include an estimate of the costs of so-called "training missions" that have been used to get U.S. equipment and personnel to weapons exhibitions without having to report the costs to Congress. Examples of this practice include the deployment of a U.S. aircraft carrier to the show in Singapore in February 1994; the assignment of an aircraft carrier and a frigate to the Dubai Air Show in March of 1995; the transfer of a B-2 bomber to Le Bourget to do demonstration flights at the Paris Air Show in 1995; and a round trip, 8,500 mile flight of the B-2 from Whiteman Air Force Base, Missouri, to Santiago, Chile, in March of 1996 to appear at the FIDAE '96 weapons exhibition. The carrier operating costs for Singapore and Dubai alone, based on an average daily operating cost of more than $1 million per day, could have run as high as $8 to $10 million. The flight of the B-2 to Paris in June of 1995 involved at least a 24 hour round trip at $14,166 per hour to operate the plane, for a total of more than $330,000. This means that the costs of sending the B-2 to fly in Paris alone cost nearly as much as the entire $342,916 official estimate of Pentagon air show costs that was submitted to Congress after the show.[42] The assertion that these deployments of major combat ships and aircraft to weapons shows can be justified on the grounds of providing meaningful training is dubious at best. These weapons systems are being sent to these shows to impress potential customers, period. The B-2's appearance at Paris in June of 1995 was the highlight of the show, to the point that even the plane's return flight to the United States was considered newsworthy enough to rate a front page photograph in the International Herald Tribune, captioned "A Bird? A Batmobile? -- It's the U.S. Air Force's B-2 Stealth bomber being refueled over the North Sea on its return to home base in Missouri after a hit appearance, the first outside the United States, at the 41st Paris Air Show."[43] The point is not whether foreign military forces will be buying B-2s any time soon (they won't), it's that putting the B-2 on display presents an aura of U.S. technical superiority in the aerospace field that can be parlayed into potential sales by manufacturers of U.S. combat aircraft that are currently up for sale. The deployment of a carrier and a frigate to the March 1995 Dubai exhibition in the United Arab Emirates represented an even more transparent marketing ploy than the B-2's jaunt to Paris. Secretary of Defense William Perry set the tone by visiting the Dubai show to spread his anti-Iranian gospel, noting in ominous tones that Iran was arming steadily just across the Gulf and that the U.A.E. and other regional sheikdoms might be well advised to build up their own military forces as well, preferably with U.S. weaponry. This exercise in threat mongering was followed by an outright pitch for U.A.E. officials to buy American: Perry joined Navy Vice Adm. Scott Redd aboard the frigate that had been parked in the U.A.E.'s harbor for the duration of the Dubai show for a press conference at which he warned the leaders of the U.A.E. that if they got into a jam with Iran like their friends in Kuwait did with Iraq a few years back, it would be much easier for the U.S. to come to their defense if they owned a U.S. combat frigate like the one they were standing on at that moment -- one that was "interoperable" with U.S. ships. Short of issuing a durect threat to U.A.E. military officials that they had better buy an American combat ship or the U.S. won't defend them in a crisis, it's hard to imagine a more blatant arms sales pitch by an American defense official. If the frigate hadn't been sent to Dubai as a prop, Perry's sales presentation would not have been nearly as dramatic.[44]
The Clinton Administration's commitment to put its top-ranking officials into the fray on behalf of U.S. weapons exports isn't limited to the kinds of activities engaged in by the late Ron Brown at the 1993 Paris Air Show or William Perry at the 1995 exhibition in the United Arab Emirates. President Clinton himself heads up the lobbying brigade from time to time, as he did at a February 1995 White House luncheon meeting with the Dutch Prime Minister which was allegedly focused on weighty matters like the future of NATO and alliance strategy on Bosnia. When the two men emerged from lunch for a brief press conference, a reporter immediately shouted out "did you convince him to buy the helicopters, Mr. President?" The helicopters in question were McDonnell Douglas Apache helicopters, which were then engaged in a fierce competition for a Dutch contract with a European consortium. Clinton acknowledged that they had discussed the helicopters and that he had pointed to the superior features of the McDonnell Douglas product; a few weeks later the Netherlands announced their decision to buy the Apaches at a cost of over $1 billion.[46] While it's hard to put a price on the President's time, much less the cost of junkets by the Secretaries of Commerce and Defense that are at least in part aimed at promoting U.S. weapons sales, the Clinton Administration's commitment of its highest officials to help make the case for U.S. arms sales represents an unprecedented windfall for American weapons manufacturers. Far from slowing down, it appears that these promotional efforts have been accelerating in recent months. Secretary of Defense William Perry took a special trip to Latin America in March of 1996 to coincide with the FIDAE 1996 arms fair in Chile, at which the Pentagon footed the bill for exhibitions of the Lockheed Martin F-16 and the McDonnell Douglas F/A-18 fighters as part of display of 10 U.S. military aircraft. This was an extremely troubling choice, given that the State Department has been holding the line against a reversal of the longstanding U.S. policy of not selling top-of-the-line combat aircraft to Latin America in the face of relentless pressure from the Pentagon and the defense industry. By displaying the F-16s in Chile and reinforcing their presence with a trip by the Secretary of Defense, the Pentagon and the industry appear to be trying to do an end run around the current U.S. policy of limiting fighter plane sales to the region. Lockheed Martin officials certainly took it as a positive sign: Dwain Hancock, the President of Lockheed Martin tactical systems, told a reporter from Jane's Defence Weekly at the FIDAE show that "the vector of U.S. government thinking on sales to this region has changed, and the rate of change is very rapid. We find this very encouraging." Hancock noted that his company has already been marketing the F-16 to Latin American air forces and asserted that "when licences are released we expect to be in formal discussions fast." If this position in favor of exporting advanced fighters to Latin America wins out as a result of the antics of U.S. officials at FIDAE '96, it won't be the first time that the Clinton Administration has jettisoned arms control and security concerns raised by arms sales to curry favor with the arms export lobby.[47] Bottom line (Air Show Policy): U.S. government subsidies for air shows average at least $26.5 million per year, more than twenty-six times the official cost estimates the Pentagon has been forwarding to Congress under the terms of the Berman amendment. This represents an increase of more than 6% over the estimated annual costs that were being incurred as of late 1993, an indication that the Clinton Administration has put additional energy and resources into this form of arms export promotion compared with its predecessors in the Bush Administration. This estimate takes into account revenue foregone from waiving leases on U.S. equipment exhibited at foreign weapons exhibitions, the full costs of either insuring the equipment at government expense or risking its loss in the event of a crash, and the additional costs incurred when weapons are deployed to air and weapons shows under the guise of "training missions."
IV. Brother Can You Spare a Billion? -- The U.S. Government Role in Financing Arms Exports Contrary to popular belief, the money for a substantial proportion of U.S. overseas arms sales comes not from cash-rich foreign potentates like the King of Saudi Arabia or fast growing industrial allies like Japan or South Korea, but from United States taxpayers. As we will demonstrate in this section, the U.S. government provides loans, grants, cash payments, and tax breaks in support of U.S. arms sales to the tune of $7.1 billion per year, a sum which represents anywhere from one-third to one-half of the value of all U.S. weapons exports in a given year. These subsidies are growing under the Clinton Administration, as a result of recent moves to create a new arms export loan guarantee fund in the Pentagon and to allow the Secretary of Defense to waive so-called recoupment fees on foreign sales -- fees that are supposed to reimburse the U.S. Treasury for a portion of the taxpayer funds invested in researching and developing weapons that are exported by private firms like Lockheed Martin and McDonnell Douglas for their own profit. The components of federal government financing for weapons exports are detailed below (see Table III and following text).
Pentagon Funding of Arms Sales: Loans, Grants, and Loan Guarantees The biggest single source of government funding for arms sales is the Pentagon's Foreign Military Financing Program (FMF), which provides loans and grants to foreign nations for the purchase of U.S. military equipment. For F.Y. 1995, the FMF program totaled just under $3.8 billion, of which $3.15 billion represented grants and $619 million represented loans. The loan program is backed up by a $47.9 million taxpayer-financed reserve fund that is used as a hedge against loans that are not repaid. While the vast majority of FMF funding goes to major regional allies like Israel and Egypt, more than two dozen nations and regional organizations have received some support from this program over the past three years, including Ethiopia, Ghana, Cambodia, Greece, Turkey, Portugal, Colombia, Ecuador, Haiti and Jamaica. The true financial beneficiaries of FMF funding are not the recipient countries -- they are U.S. defense contractors. Although Israel is allowed to spend a small portion of its FMF funding on weapons procurement within Israel, most FMF program dollars go to support big ticket items like Egypt's purchase of Lockheed Martin F-16 fighter planes and General Dynamics M-1 tanks or Israel's import of McDonnell Douglas F-15 fighters. In these instances, the FMF program is simply a roundabout way of funneling money from U.S. taxpayers into the coffers of major arms exporting firms; in many cases the funds never leave the United States, but are held in the Pentagon's Foreign Military Sales trust fund and issued to U.S. companies as defense contracts as their work on a given foreign order proceeds. Industry representatives vigorously deny that FMF financing represents a subsidy to domestic weapons manufacturers, but if one follows the money, that is exactly what the program is. Whether current levels of military assistance to Israel and Egypt can be justified on foreign policy grounds is a separate issue; there is no question that U.S. arms exporting firms reap the bulk of the financial benefits from FMF spending. Total Pentagon subsidies for arms sales -- including the FMF program and the other subsidies outlined in Table III and discussed in this chapter -- totaled $4.9 billion in 1995. This makes Department of Defense subsidies for corporate arms merchants the second largest business assistance program in the federal budget, after agricultural price supports, which totaled $7.9 billion last year; and ahead of applied biomedical research, which was budgeted at $3.7 billion.[48] In December of 1995, President Clinton signed legislation that will establish an additional source of Pentagon support for arms sales, the Defense Financing Facility (DFF). The DFF is an open-ended, multi-billion dollar arms export loan guarantee fund that the Secretary of Defense may use to support sales to over three dozen countries, from Western allies like Germany and the United Kingdom to more controversial clients such as Turkey, Rumania, Indonesia, and Singapore. Unlike the Pentagon's existing FMF loan program, the DFF provides for no government appropriations to support a reserve fund to cover bad loans. In the hopes of convincing members of Congress that the program would be conducted "at no cost to the taxpayer," industry lobbyists structured a program in which the reserve fund would be paid for by the recipient country [for details of the defense industry's lobbying effort on behalf of this new loan guarantee fund, see section VI, below]. In fact, passing the costs of the reserve fund on to U.S. arms clients will only increase the likelihood of these loans going into default. The whole point of the DFF is to provide loans to countries for arms deals that are considered too risky to be funded by private banks. Making these same buyers kick in extra money up front only increases the financial pressure on the purchasing country, thereby increasing the prospect that some of these nations will fall behind on their payments or renounce their commitments altogether. The record of similar loan guarantee programs for defense-related items suggest that the new Defense Finance Facility could easily rack up billions of dollars worth of losses over the next decade. During the 1990s alone, U.S. arms clients have failed to repay roughly $10 billion in U.S. government guaranteed loans. These losses include large write-offs like the Bush Administration's decision to forgive $7 billion in military loans to Egypt during the Persian Gulf War, Iraq's default on close to $2 billion in loans for militarily useful technologies that were backed up by the U.S. government's Commodity Credit Corporation (CCC) and the Export-Import Bank, and the Clinton Administration's initiative to forgive over $300 million worth of U.S. arms sales loans to Jordan. These large losses are far from isolated instances. As of September 30, 1994, clients for U.S. weaponry were in arrears to the tune of $16 billion on foreign military financing loans guaranteed by the U.S. government, and the West African nations of Niger and Senegal had defaulted on loans worth $7 million. These losses were not covered by the banks that made the initial loans or the U.S. companies that exported the weapons financed by those loans -- they were covered by U.S. taxpayers, who by virtue of the government guarantee provided for these loans becomes the payer of last resort when financially unstable clients default on their obligations.[49] If these substantial losses have been incurred on loan programs that had properly established reserve funds, how much more risky will loans from the Defense Finance Facility be, when its reserve fund is based on fees paid by already financially pressed recipient nations? When it reviewed the program, the Congressional Budget Office asserted that "because some of the countries eligible for guarantees under the program have high credit risks, the subsidy costs could be significant." This is surely an understatement, given that $10 billion in foreign military sales loans have been written off in this decade alone. If the Clinton Administration (or its successor) choose to utilize the Defense Finance Facility to support a significant volume of arms sales, losses averaging in the hundreds of millions up to a billion dollars are within the realm of possibility. The only way to forestall this possibility would be for President Clinton unequivocally state that his administration will refuse to activate the new fund. This is not out of the question, given that the administration spoke out against it at several key points during 1995. A more likely scenario would be for the administration to hold the DFF in reserve, and utilize it on the first multi-billion dollar arms sale for which funding under the Pentagon's existing FMF program is not available. The arms export lobby will be sure to press for the fund to be used in support of the next major sales opportunity to Turkey, or Indonesia, or Singapore, or some other client that doesn't have enough money or aid to close the deal.[50] Bottom line (subsidies under the Pentagon's FMF program): Grants and loans for U.S. arms sales under the Pentagon's FMF program totaled $3.8 billion in F.Y. 1995, of which $3.2 billion represented appropriated funds and the remainder represented government-backed loans. Other than a small portion of this funding that is allowed to be spent by Israel on defense procurement within its own borders, the FMF program represents a direct export subsidy to the U.S. arms industry. As for the newly formed Defense Financing Facility, a separate loan guarantee program for arms exports authorized by Congress in 1995, if fully utilized it could cost taxpayers anywhere from several hundred million to one billion dollars per year to cover the costs of bad loans that will not be repaid by foreign weapons clients. Annualized costs of loans gone bad under previous military-related financing programs are already averaging over $1 billion per year since 1990.
Excess
Defense Articles: The Pentagon is Giving These Weapons Away! Given that EDA transfers involve equipment that is no longer being used by U.S. forces, it's hard to make a precise estimate of the subsidy involved in providing these items to foreign governments. But there is no question that the value of the subsidy is substantial. When Congress is notified regarding excess defense article transfers, the Department of Defense is required to report the original acquisition cost to the U.S. government of the items in question along with an estimate of the article's value at the time of the transfers. For the five years from F.Y. 1990 through F.Y. 1994 the Pentagon transferred items under EDA with an original acquisition value of more than $4 billion and an estimated current value of more than $1.2 billion. For F.Y. 1994, the most recent year for which full data is available, the current value of items given away under EDA totaled $154.2 million. This is probably a low estimate: the General Accounting Office has documented instances in recent years in which the Pentagon and the military services have systematically underestimated the value of items transferred under EDA in their reports to Congress. To cite just one example, although Pentagon regulations call for items to be valued at 50% of their original acquisition cost if the item is in good condition, but at only 5% of acquisition cost if the item needs to be repaired before it can be used, the Army adopted a policy of pricing all tactical wheeled vehicles transferred under EDA at 5 to 10% of their acquisition cost, regardless of what condition they are in at the time of the transfer. Given that the Army transferred 20,000 tactical wheeled vehicles to foreign countries between F.Y. 1990 and F.Y. 1992 alone, this policy of routinely undervaluing serviceable vehicles results in the cost of EDA transfers being undervalued by millions of dollars. The GAO also found specific cases of undervaluing on EDA transfers handled by the Air Force and the Navy that added up to hundreds of millions of dollars. A conservative estimate of the added subsidy costs represented by this systematic undervaluing of items transferred under the EDA program would be $50 million per year, which added to the roughly $150 million in costs already reported by the Pentagon would put the annual total at $200 million.[52] Although the EDA program provides no direct financial subsidies to U.S. weapons exporting firms, it supplies intangible marketing benefits. First of all, the Pentagon has pledged to run the program in a way that does not undercut potential new sales of comparable equipment. Companies can phone into a Pentagon data base of potential EDA transfers, and can move to block EDA giveaways to countries that might be potential paying customers for similar systems. Second and perhaps as important, EDA transfers offer a way to keep potential customers acclimated to U.S.-origin equipment. For example, when Egypt or Turkey receives surplus tanks or transport planes via EDA channels, the U.S. company that builds that item can get an inside track on new sales, not to mention possible contracts to upgrade the used equipment. EDA transfers serve as a sort of "loss leader" for future sales of new equipment to these same governments. To the extent that these sales materialize, private U.S. firms will be the beneficiaries. Bottom line (Excess Defense Articles): Since F.Y. 1990, the Department of Defense has given away (or sold at a steep discount) excess defense articles that originally cost U.S. taxpayers over $4 billion to acquire. Taking into account the age of the equipment when transferred, and correcting for systematic undervaluing of EDA equipment by the Pentagon and the military services, a conservative estimate of the annual costs of EDA weapons giveaways is $200 million. More accurate cost estimating policies by the Pentagon and the military services could reveal additional subsidies of hundreds of millions of dollars.
Indirect
Financing for Arms Sales: Economic Support Funds Although U.S. government officials have tried to dress up the ESF program as a development program rather than a disguised form of military aid, a closer look at how ESF funds are distributed does not support this claim. In F.Y. 1995, 88% of program funds went to three major U.S. arms clients, Israel, Egypt, and Turkey. In the case of Israel, the role of ESF in financing arms sales is direct: U.S. law permits the Israeli government to use ESF dollars to pay down its past military sales debts to the United States. In the case of Turkey, support is indirect: for the past decade all of Turkey's ESF aid from the United States has come in the form of cash payments, and these payments have come in amounts adequate to offset the costs of all Turkish military purchases from the United States that were not paid for by direct military aid programs. In Egypt, ESF funds are mostly provided to support specific commodity imports, but even this practice frees up an equivalent amount of foreign exchange that can be utilized to cover some of the costs of Egypt's military purchases from the United States. ESF's status as a military-related program is further documented by looking at its history. Up until the late 1970s the program was known as Security Supporting Assistance (SSA), in acknowledgment of its function as a source of additional funding for nations that were already receiving military aid or military loans from the United States. Further evidence of the program's military-related intent is provided by the fact that even after the program's name was changed to Economic Support Funds, it continued to be classified as a security assistance program, alongside the Pentagon's FMS program and the State Department's commercial arms sales program. In September 1986, Rep. Lee Hamilton (D-IN) asked the General Accounting Office (GAO) to investigate the potential for diversion of Economic Support Funds to military uses. The resulting GAO report, released in January of 1987, identified the weak link in Executive Branch arguments regarding the benign civilian character of ESF support: "Providing dollar assistance frees up other resources to be used as the recipient chooses. The extent to which a country could use these resources for other purposes, including military expenses, depends on many factors including its political stability, economic well-being, and the military assistance it receives compared to its defense requirements."[53] The conditions
under which U.S. cash assistance will most likely be used to support
weapons imports rather than promote civilian economic development
are all clearly present in the cases of the three largest ESF recipients,
Israel, Turkey, and Egypt: On this last point, the GAO acknowledged as much when it stated that "some large programs, including those in Egypt, Israel, and Turkey, which are based on political and security considerations, have few associated controls." In a table in one of the appendices to the report, GAO underscored this point by listing Egypt, Israel, and Turkey as recipients of ESF cash transfers for whom the uses of the funds are "not specifically defined."[54] As further evidence of how easy it is for U.S. allies to apply ESF funds to offset arms purchases, it should be noted that at least 70% of the program's disbursements during F.Y. 1995 were in the form of cash payments rather than funds designated to support specific civilian objectives. Whatever one chooses to call it, the reality is that ESF financing serves as an indirect mechanism for subsidizing major U.S. weapons clients, which in turn gives them either the cash or the budgetary flexibility to sustain their substantial arms purchases from U.S. companies. If ESF were truly an economic development program, disbursement of ESF funds would be based on different criteria (such as the level of need of the recipient nation), and the bulk of program funds would not be routinely set aside for major U.S. arms clients as is currently the case.[55] Bottom line (indirect ESF subsidies for arms exports): In dollar terms, indirect ESF subsidies for arms exports amounted $2.1 billion in F.Y. 1995. Although a small portion of ESF funding goes to support specific civilian projects in foreign countries, 90 percent of program funding serves as an indirect subsidy to foreign purchasers of U.S. weaponry which provides them with either the cash resources or the financial flexibility needed to purchase weaponry from U.S. firms. Since it enables key allies to purchase this additional weaponry, the program also serves as an indirect subsidy to the U.S. arms industry.
Repealing
Recoupment Fees: A Tax Subsidy for Foreign Arms Clients First of all, U.S. government spending on military R&D dwarfs the investments of other major competitors -- as indicated above (see section II), the Pentagon's weapons R&D budget is five times that of all Western European nations combined.[56] This means that U.S. firms can develop state-of-the-art weaponry with a minimal investment of company funds relative to their international rivals. Second, because the government pays the cost of product development (and, in many cases, of building the initial plant and equipment used to produce exportable weapons systems), U.S. firms can obtain considerably higher profit margins on their export sales (see discussion above, in section II). These high profits for private arms manufacturers are made possible in large part by the taxpayer investment that allowed these companies to develop and perfect the weapons systems that they then turn around and export to foreign buyers at handsome prices. In order to pay back a part of this taxpayer investment in these weapons systems, for over a quarter of a century it was U.S. government policy to assess "recoupment fees" on foreign sales of U.S. military equipment. The fees are determined by dividing total research and development and other one-time production costs -- such as provision of plant and equipment at government expense -- by the total number of units that are expected to be produced for both the U.S. and foreign markets. Under this system, the fee on any given sale can range from roughly 5 to 25% of the sales price. Estimates by the General Accounting Office indicate that if the fees are imposed on all FMS and commercial arms sales, revenues recouped by the Treasury will average roughly $500 million per year. For various reasons -- not the least of them industry lobbying efforts -- the imposition of recoupment fees has been steadily eroded, costing taxpayers hundreds of millions of dollars per year in the process. The first bite out of recoupment revenues came from the increasingly popular practice of waiving the fees on sales to NATO allies, Japan, and Australia. The GAO estimates that between 1991 and 1994, revenues foregone as a result of these waivers totaled $773.4 million, an average of over $190 million per year. In F.Y. 1994 alone, a total of $273 million in fees were waived, a figure nearly 50% higher than the $181 million in recoupment fees that the Pentagon actually collected in that year. Roughly 90 percent of the F.Y. 1994 waiver amounts involved sales to Norway (of missiles) and Turkey (of missiles, aircraft, gun mounts, sonars, and vertical launchers). The waivers for Turkey were justified as part of the arrangement that gives U.S. forces the right to use military bases on Turkish soil, and as such can be considered a hidden military subsidy to Turkey over and above the direct U.S. military aid that the U.S. provides to the Ankara government.[57] The second major reduction in recoupment revenues came when the Bush Administration acceded to industry demands to repeal the fees on commercial arms sales. This change was implemented administratively, because only the recoupment fees on FMS transactions are specifically written into existing law. The Congressional Budget Office has estimated that if the fees on commercial sales had been restored last year, revenues to the Treasury would have increased by $110 million in F.Y. 1996, rising to $250 million per year by the year 2000.[58] The Clinton Administration took the final step towards eliminating recoupment fees when it introduced legislation in 1995 that would repeal the fees on Foreign Military Sales administered by the Pentagon. This move was opposed by Congressional advocates of arms transfer control as well as supporters of responsible approaches to deficit reduction. A compromise was ultimately reached that would give the President the flexibility to waive recoupment fees to nations other than the NATO nations, Japan, and Australia (which are already eligible for such waivers). This new legislation will result in the elimination of most, if not all, of the remaining annual recoupment fees, which were slated to bring in about $160 to $170 million per year over the next five years. If all of the remaining fees end up being waived, the total cost of recoupment waivers to U.S. taxpayers will jump to $500 million per year.[59] Industry proponents of repeal have argued that it is the only way to "level the playing field," both between U.S. companies and their foreign competitors and between the two major channels for U.S. arms exports, FMS and commercial sales. With respect to foreign competitors, the Pentagon's own forecast of future arms trade trends indicates that the United States is likely to control 50 to 60% of the total world arms market through the year 2000 regardless of what financial incentives the U.S. government chooses to provide. This built-in U.S. edge in the arms market is based on established relationships with key clients and the perceived political, strategic, and technical advantages of purchasing U.S. equipment, not on the availability of U.S. government subsidies. In the words of the Pentagon report, "The forecasts support a continuing strong defense trade performance for U.S. defense products through the end of the decade and beyond. In a large number of cases, the U.S. is clearly the preferred provider, and there is little meaningful competition with suppliers from other countries. An increase in the level of support the U.S. government currently provides for arms exports is unlikely to shift the U.S. export market share outside a range from 53 to 59 percent of world-wide arms trade [emphasis added]."[60] So there is no need to gut recoupment fees to help U.S. manufacturers to "level the playing field" -- they already own the playing field, and will do so for the foreseeable future. As for creating equal treatment for the Foreign Military Sales and Commercial Sales channels, analyst Lora Lumpe of the Federation of American Scientists has rightly pointed out that the best way to achieve parity would be to reimpose recoupment fees on commercial sales, not lift them on FMS transactions. The result of restoring full recoupment fees, with no waivers, on both FMS and commercial sales, would be to guarantee a steady stream of revenue to the U.S. Treasury of approximately $500 million per year. Under current law and regulations, that amount is likely to plummet to zero. Bottom line (repeal of recoupment fees): Waiving and repealing recoupment fees on U.S. arms exports is now costing the U.S. Treasury an estimated $500 million per year in lost revenues. This money will accrue either to foreign weapons clients (in the form of lower prices) or to U.S. weapons exporting firms (who may choose to keep their prices steady and pocket the difference). In either instance, the reduction in fees represents an unnecessary but growing taxpayer subsidy to the arms export sector at a time when virtually every other federal program is being scrutinized for possible cutbacks.
Exploiting
Loopholes: Export-Import Bank Financing of Military-Related Equipment
The first opening for using ExIm resources to back military exports came in 1988, when Congress passed legislation permitting bank funds to be utilized in support of sales of weapons to developing nations for antinarcotics efforts. The government of Colombia has received $1.5 million in ExIm guaranteed loans for these purposes since 1989. A second, one-time loophole was created in 1989, when Senators Christopher Dodd (D-CT) and Christopher Bond (R-MO) pushed through an amendment allowing a one year exception to the prohibition on ExIm funding of military exports to permit support for commercial sales of defense equipment to Greece and Turkey. This exception paved the way for $1.3 billion in ExIm loan guarantees for a sale of Black Hawk military transport helicopters to Turkey. The Black Hawks, which are produced in Sen. Dodd's home state of Connecticut, have been utilized in the Turkish military's campaign of bombing and burning Kurdish villages in southeastern Turkey as part of the government's war against the Kurdish Worker's Party (PKK).[61] The most recent breach in ExIm's policy against financing military exports came in October of 1994, when Congress passed legislation allowing for the export of "nonlethal" defense articles and services. Among the items that can be financed under this provision are military radars, transport trucks, light helicopters, and other items that can be quite useful to governments engaged in either internal or external conflicts. The biggest sale financed under the "nonlethal" provision so far is a $1.4 billion sale of a Raytheon radar system to the Brazil, allegedly for the purpose of monitoring environmental conditions in the Amazon rain forest. A more likely use for the system would be in a military mode, as a means of keeping tabs on drug traffickers or anti-government guerrilla forces in the area. Questions about how the system may ultimately be used in Brazil have been pushed onto the back burner for the moment by allegations of bribery of Brazilian officials by Raytheon in its quest to win the radar contract from a competing French firm.[62] Bottom line (ExIm Bank): Since 1990, Congress has passed several loopholes in the longstanding legislative prohibition against using ExIm Bank funding in support of military exports, paving the way for $2.7 billion in ExIm loans for military-related sales to foreign governments, at an estimated subsidy cost to taxpayers of $125 million (for a description of the methodology used in estimating this subsidy, see note 62). Given that the recipients of the bulk of these funds, Turkey and Brazil, still have significant debt burdens, there is a possibility that U.S. taxpayers could end up paying for a substantial part of the cost of these loans.
V.
Exporting Jobs: Coproduction and Offset Agreements
The idealized scenario for arms sales that is put forward by lobbyists for the U.S. arms industry involves a well-heeled customer like Saudi Arabia or Kuwait paying billions of dollars in cash for a shiny new batch of U.S.-made tanks or fighter planes, creating tens of thousands of American jobs in the process. This ideal case is rarely realized in practice, for the simple reason that most U.S. arms sales now involve either taxpayer funding, or overseas production, or both. This systematic export of dollars and jobs drastically undercuts the net employment benefits of arms sales to workers in the United States. The extent of taxpayer financing involved in U.S. arms exports has been documented already, in the first three sections of this report. Although the subsidies take a variety of forms, the mechanism is fairly straightforward: the federal government spends $7.6 billion per year on personnel, activities, and loans and grants designed to support the export of U.S. weaponry to client nations. But there is a second level of subsidies involved in arms exports that does not involve the federal government directly: subsidies provided by U.S. arms manufacturing firms to their foreign clients as a way of "sweetening the deal." These corporate subsidies take the form of offset arrangements. Offset is a polite way of saying "kickback." When Korea, or Taiwan, or Turkey buys multiple units of a major U.S. weapons system for $2 or $3 billion, the supplying company routinely agrees to steer a few billion dollars of business back to the foreign purchaser. The business can be in the form of coproduction (building all or part of the U.S.-supplied weapon in the purchasing country), specific company investments in the client nation (ranging from building hotels and conference centers to investing in non-defense high tech sectors), or assistance to the purchasing country in promoting its products in the United States. The going rate for offsets is in the range of 50 to 100% of the value of the arms sale that the offset arrangement is linked to; that means that on most major arms sales U.S. firms agree to steer business worth 50 to 100% of the value of the original deal back to the economy of the purchasing nation. A recent deal to sell McDonnell Douglas Apache helicopters to the Netherlands for $1 billion (the same deal that President Clinton personally lobbied for at a White House luncheon with the Dutch Prime Minister) actually contained an offset commitment of 150%, which means that McDonnell Douglas agreed to generate $1.5 billion in new business for companies in the Netherlands as a condition of the sale. An April 1996 study by the General Accounting Office provides new evidence of the growing levels of technology transfer and overseas production involved in offset deals between U.S. arms companies and their foreign clients. GAO estimates that U.S. firms have entered into offset agreements worth over $84 billion since the mid-1980s. European allies like the United Kingdom and the Netherlands are routinely demanding offsets in excess of 100% of the value of the arms sale, and the deals often include strict requirements that the offset work involve defense or high tech production in the purchasing nation. Since most offset business comes at the expense of purchases or investments that might otherwise have gone to U.S. firms, the practice of providing offsets represents a drain on jobs and economic activity in the United States.[63] When government financing and corporate offset agreements converge in the same deal, the result can be an arms sale that actually results in a net loss of jobs in the United States. A 1991 sale of 40 F-16 fighter aircraft to Egypt is a good case in point. When the $1.6 billion sale was announced in March of 1991, shortly after the end of the Persian Gulf War, it was widely praised as yet another great boon for jobs in America. Nothing could have been further from the truth. To start with, the Egyptian F-16 deal was paid for by U.S. taxpayers, not the Egyptian treasury. The entire transaction was financed out of Egypt's $2 billion annual security assistance program from the United States. The effect of this arrangement is to take money out of the pockets of U.S. taxpayers and hand it over to the Lockheed Martin Corporation, the prime contractor for the F-16. There is no inflow of money to the U.S. economy from Egypt. But wherever the money came from, at least the Egyptian F-16 sale helped sustain defense industry jobs in the United States, right? Wrong. The Bush Administration decided that Egypt's F-16s would not even be built in the United States; instead, the majority of the assembly and production work on the planes was done at F-16 production facilities in Turkey which had been set up as part of a prior coproduction deal with that nation. The decision to build the planes in Turkey was strictly political -- it was the Bush Administration's way of paying back the Turkish government for its support of the U.S.-led coalition in the 1991 Persian Gulf War. In providing this quid pro quo to Turkey, the administration inadvertently highlighted one of the U.S. arms industry's best kept secrets: its wheeling and dealing in arms on the international market often does more to export jobs overseas than it does to create them in the United States.[64] The Egyptian F-16 sale is far from an isolated instance of exporting arms production jobs as part of a major U.S. arms sale. In fact, as a result of coproduction and offset deals dating back to the mid-1970s, the F-16 has increasingly become a "world aircraft," with components under production in ten different nations: Belgium, Holland, Denmark, Norway, Turkey, Taiwan, Singapore, South Korea, Japan and Israel. Turkey and South Korea have full scale F-16 assembly lines up and running under coproduction arrangements with Lockheed Martin that were established in connection with the major sales to those nations. Aside from Japan, the other nations on the list produce F-16 components, both for use in the aircraft they purchase from the U.S. and for incorporation into F-16s procured by the U.S. Air Force or other foreign clients. For example, when F-16s were sold to four European coproduction partners (Belgium, Norway, Denmark, and the Netherlands) in 1975, each of the four partners received partial F-16 production lines plus rights to supply 10% of the value of all future F-16 sales to any other nation (including the U.S. Air Force). The result of this agreement is to permanently export roughly 10% of the jobs associated with all F-16 sales. In Japan, proprietary information on how to build various components of the F-16 has been transferred to Mitsubishi Heavy Industries by Lockheed Martin as part of Japan's development of its indigenous, next generation FSX fighter plane. This contribution to the development of Japan's military aerospace sector could come back to haunt the United States down the road, if Japan ever changes its constitutional prohibition on exporting finished weapons systems. According to the Wall Street Journal, "Japanese military and industry officials, staggered by the cost of the FSX, make no secret of their desire to build weapons for export." As one Japanese Air Force colonel put it, "if we could build 3,000 [a level only possible via major export activity], we could get the price down to $20 million per copy." At that point U.S. firms like Lockheed Martin could find themselves losing foreign sales to a Japanese fighter aircraft that they helped to create.[65] In the mean time, Japan has already parlayed its years of coproduction experience on U.S. military aircraft into a major role as a components supplier for commercial planes, such as the Boeing 767 and the new Boeing 777 (for which Japanese firms now supply about 21% of the total aircraft). Some of this work has displaced U.S. firms, as in a case documented by the GAO in which "a Japanese firm that received technical and manufacturing assistance from the U.S. firm to produce F-15 actuators, won the contract for actuators for the Boeing 777 over a U.S. firm that previously supplied the component for Boeing aircraft."[66] With components regularly being produced in Taiwan, Singapore, and Israel, plus full scale assembly and production in South Korea and Turkey, the F-16 program now supports more jobs overseas than it does in factories in the United States. For example, when President Bush went to Forth Worth, Texas in September of 1992 to announce a proposed sale of 160 F-16s to Taiwan, there were more than 3,600 workers employed at the F-16 production facility there. By early 1996, when the first of the F-16s for Taiwan was being delivered, the number of workers employed on the F-16 line at Fort Worth had dropped to only 1,155, less than one-third of the total jobs at the plant in September of 1992.[67] This precipitous drop in domestic employment despite a major export deal reflects several processes that are working in parallel to dilute the domestic jobs impact of U.S. arms sales. First of all, there are ebbs and flows in the production process on a major aircraft order: some of the workers employed to produce long lead-time parts and other components for the Taiwan F-16s have already been laid off, now that the assembly phase is in full gear. For these workers, the highly touted "blockbuster" deal with Taiwan supplied at most eighteen months to two years of additional employment: this was hardly the enduring boost to U.S. jobs implied by the Bush Administration and the plane's manufacturer when the deal was first announced. The other factor accounting for the sharp drop in F-16 jobs in Fort Worth despite major export sales is the sharing out of work with foreign companies under offset and coproduction deals. The globalization of F-16 production has given Lockheed Martin tremendous flexibility to move production to any number of overseas sites at the expense of jobs in Fort Worth, and the company has apparently done just that. In June of 1992, the International Association of Machinists (IAM), which represents workers at the Fort Worth plant, sponsored a demonstration to protest then-owner General Dynamics' decision to invite South Korean workers to the plant to learn key assembly tasks for the F-16 that could be applied to work on the F-16 production line that was then being set up in Seoul, South Korea. Under the terms of a 1992 sale of 120 F-16s to South Korea, only 12 of the aircraft would be fully produced in Fort Worth, with the next 36 assembled from kits in South Korea, and the final 72 built entirely in Korea by Samsung Aerospace, the lead Korean contractor working on the deal. In order to help Samsung get its production line in order, General Dynamics had planned to bring 500 Korean workers to Fort Worth to learn the nuts and bolts of F-16 production from American workers. The protest convinced management to withdraw this plan, but as IAM international president George Kourpias noted, the company simply did an end run around the workers' demands: "While 3,000 IAM members at this facility were on lay-off, GD wanted to bring at least 500 South Koreans into the plant and train them in F-16 production techniques. The protest put a stop to this scheme . . . we thought. But then we learned that General Dynamics simply arranged for these Samsung Aerospace workers [from Korea] to be trained at the F-16 plant in Turkey!"[68] Lockheed Martin, the current owner of the F-16 production line, has maintained the same practices initiated by General Dynamics. The net result of all these overseas production arrangements is sobering for anyone who thinks of U.S. arms sales as a major domestic job creator. The biggest single concentration of F-16 production jobs -- approximately 2,000 at a single facility -- is located not in Fort Worth, Texas but in Ankara, Turkey, where TUSAS Aerospace Industries is in the process of building 240 F-16s under a series of deals going back to the 1980s.[69] Ironically, because Turkey's F-16 program is entirely funded by U.S. government grants and subsidized loans while the Lockheed Martin plant in Fort Worth produces some F-16s for cash paying foreign customers like Taiwan, a higher proportion of the 2,000 F-16 jobs in Ankara, Turkey are paid for with U.S. taxpayer funds than is the case for the 1,155 F-16 production jobs that are left in Fort Worth, Texas. Just as the first negative economic aspect of the Egyptian F-16 sale -- overseas production of U.S. arms destined for export -- is replicated in numerous other cases, so is the second negative consequence of the deal: the use of U.S. taxpayer funding to subsidize overseas production. A June 1994 report by the General Accounting Office review of 48 Foreign Military Sales contracts funded through the Pentagon's FMF program documented $4.7 billion in direct and indirect offsets provided by U.S. industry on arms export deals worth a total of $11.6 billion. The remarkable aspect of these offsets -- which primarily involved deals with Egypt, Israel, and Turkey -- was that they were provided on deals funded by U.S. military aid programs. The normal argument in favor of offset deals is that they are a sort of "necessary evil" needed to close deals in which the client nation can just turn to another supplier if a sufficient level of offset activity is not provided. But in the case of aid-funded deals, the client already has an overwhelming incentive to "buy American" -- the fact that U.S. taxpayers are footing the bill for the sale. To then seek offsets which benefit the client nation's economy to the detriment of U.S. businesses on top of an aid funded deal only adds economic insult to taxpayer injury.[70] The recent announcement by McDonnell Douglas and General Electric of $1.1 billion in offsets to Israel in connection with a military aid-funded transfer of F-15I fighter aircraft to that nation provides some insight into how U.S. companies are now routinely channeling high tech production work to overseas locations. As a direct offset, Israeli firms will produce advanced electronic warfare systems that will be integrated into the F-15s. Indirect offsets being considered by McDonnell Douglas include the possible purchase of low orbit boosters from Israeli Aircraft Industries for use in the U.S. space program.[71] The overall impact of offsets on jobs and business in the United States is hard to determine because there is no accurate or systematic reporting system to capture all offset arrangements. As of this writing, the Commerce Department was due to release a legislatively mandated study on the offset phenomenon. In the absence of comprehensive data, anecdotal evidence and past studies on the subject suggest that offsets represent at least one-third to one-half of the value of all U.S. arms sales. When combined with the fact that nearly one-half of all arms exports in the most recent year were counterbalanced by $7.6 billion in taxpayer subsidies, it appears that U.S. arms sales account for at best a marginal net gain in business and jobs for U.S. firms -- in the range of a few billion dollars per year and 50,000 to 75,000 net jobs -- and at worst a net loss of jobs and income of similar magnitude.[72] Given that the current buyer's market for arms is likely to continue through the end of this decade, the net gains to the U.S. economy from arms sales are likely to drop even further. As a sign of the times, McDonnell Douglas recently agreed to invest $18 million in a petrochemical facility in the United Arab Emirates as a "pre-offset" that could be applied against a possible sale of the company's F-18 fighter aircraft to that nation.[73] Whether or not McDonnell Douglas gets the sale, the export of capital -- and the potential jobs that capital could have provided if it had been invested in the United States -- will happen anyway. How many more deals like this one will be concluded before the U.S. government joins with its key trading partners in putting some sort of limits on the provision of offsets in foreign arms sales?
VI. Picking
Winners and Losers: The Opportunity Costs of Subsidizing Arms Exports
a. Figures in the column on net employment gain represent the increase in domestic employment yielded by transferring $1 billion from subsidizing arms exports to the activity listed in that column: health care, education, housing, or mass transit. In the current budgetary environment in Washington, there are also significant qualitative tradeoffs involved in spending $7.6 billion per year on subsidies for weapons exports. If these same funds were spent instead on social welfare programs, they could support construction of 100,000 units of low income housing per year, provide Head Start early childhood education services to more than 130,000 children, and still leave at least $2 billion in savings that could be applied to deficit reduction.[75] Transferring funds from a military purpose like arms export promotion to any domestic program may be a hard sell in the current political environment in Washington, but there are other more politically popular uses of these same funds that could also yield substantial economic benefits. For example, the National Commission on Economic Conversion and Disarmament has done a preliminary estimate of the relative benefits of utilizing government resources to promote exports of environmental technology rather than weapons. The Commission has found that spending funds to support environmental exports could yield a far greater economic payoff for U.S. companies and their employees than the current focus on promoting arms sales does. The U.S. government is currently spending in excess of $7.6 billion per year in an effort to try to increase the already large U.S. share of the international arms market, which is now at roughly $38 billion per year and falling. At the same time, the federal government is spending only $10 million per year on the Environmental Protection Agency's Environmental Technology Initiative, a project designed to help small and medium-sized U.S. companies export environmental protection equipment, a market that is expected to grow to between $190 and $240 billion by the end of this decade. The United States ranks number one in government spending to promote arms exports, but it is dead last among major economic powers in supporting environmental exports. According to an April 1995 report on environmental technology markets by the White House Science Council, "Among the world's major trading nations, the United States ranks last or next to last or next to last in export promotion indicators such as spending per capita, spending as a share of gross domestic product, and spending as a fraction of manufacturing exports."[76] In short, in a growing market for environmental technologies where U.S. firms could make major gains with a modest increase in government support, the federal government is decreasing its export promotion efforts; but in a shrinking international market for weapons in which U.S. firms already control roughly half of all sales being made, the Clinton Administration and the Congress have moved to increase governmental export promotion subsidies beyond their already enormous levels. In fact, at a time when the Pentagon is projecting that U.S. arms sales may level off at $12 to $16 billion per year for the foreseeable future, the $7 to $8 billion in U.S. government subsidies for arms sales represent fully one-half the value of all U.S. arms exports.[77] As a purely economic proposition, pouring more government subsidies into this dead end market makes absolutely no sense, especially when there are alternative markets where government support could leverage far larger increases in exports by U.S. firms. In addition to the immediate tradeoffs involved in investing U.S. government dollars in arms export promotion, this distorted use of taxpayer dollars has negative consequences for the economies of developing nations. As of F.Y. 1995, arms export subsidies accounted for more than one-half of U.S. bilateral foreign aid and just under 40% of total U.S. foreign aid. By spending more money and effort promoting arms sales in the Third World than it spends promoting economic and human development projects, the United States is contributing to the ongoing militarization of these nation's economies, a process which undermines their ability to provide adequate employment and income to their citizenry. [see Table V, below].
The tradeoffs in spending dollars on arms rather than social welfare are even more stark in developing nations than they are in the United States. According to estimates provided in the United Nations Human Development Report for 1994, the billions of dollars that U.S. taxpayers spend subsidizing weapons exports would be more than enough to eliminate illiteracy among 450 million of the 900 million adults in the world who cannot read. Alternatively, the U.S. taxpayer money now squandered on weapons proliferation could finance more than half the cost of a global effort to provide primary health care for all (including immunization of all children) and eliminate severe malnutrition. Applied to specific countries, the arms/development tradeoffs are even more telling. For the cost of just one deal for 28 U.S. missiles, the government of South Korea could have immunized all of its 120,000 unimmunized children and provided safe drinking water for three years to its 3.5 million residents who lack safe water. In Pakistan, the cost of a multi-billion dollar package of French Mirage 2000 fighter aircraft could have provided a staggering array of necessary services: safe water for 2 years for the 55 million Pakistanis who lack this essential service; family planning services for 20 million couples in need; essential medicines for 13 million people without access to health care; and basic education for 12 million children not now enrolled in public school.[78] These negative impacts of encouraging Third World nations to spend money on arms rather than human needs are not merely of economic concern in the recipient countries; they also result in slower global economic growth and smaller markets for the whole range of products and services exported by the United States. A November 1993 report by the International Monetary Fund estimated that a 20% coordinated global reduction in military spending could over time generate enough new economic growth to spawn $190 billion in new consumer markets worldwide, a figure four to five times the size of the current global market in armaments. And as the Project on Demilitarization and Democracy pointed out in a 1993 report on the impacts of arms spending on developing nations, nations like Somalia, or Peru, or Liberia which end up using their imported armaments in violent civil conflicts often become economic basket cases, costing the United States and the international community billions of dollars in food and refugee aid for years after the conflicts have been halted. The costs of fueling civil wars through arms sales end up hitting the U.S. economy at two levels: the immediate cost of providing humanitarian assistance to deal with the consequences of the war and the long-term costs of foregoing the potential export markets that might have been developed in these nations if their economies had not been ravaged by war.[79] Looked at from all of these perspectives -- tradeoffs with domestic jobs and services that could be generated with the same funds, possibilities for promoting more lucrative export markets for U.S. firms, and the effects of U.S. government arms sales promotion in depressing Third World economic growth and undermining potential future markets for U.S. civilian exports of all kinds -- continuing to spend $7.6 billion in U.S. taxpayer funds subsidizing arms sales by U.S. defense firms is an extremely costly policy that cannot be justified based on the economic returns provided by this particular public investment.
VII.
Cashing In: The Arms Export Lobby's Campaign to Boost
Export Subsidies
FMS awards are the largest channel through which U.S.-government brokered arms deals are translated into revenues and profits for major U.S. defense contractors, but for some firms in some years commercial arms sales licensed by the Department of State can provide equal or greater revenues. Breakdowns of commercial sales by company are not reported on any regular basis, but the last time the General Accounting Office took a serious look at this question, the top 25 commercial arms exporting firms taken together had licenses outstanding worth $10 to $12 billion per year. Although only one-third to one-half of these applications generally result in completed sales, the commercial sales route still represents billions of dollars in additional annual business for U.S. weapons exporting firms.[80] While foreign sales may represent anywhere from 5 to 25% of the revenues of a major firm like Lockheed Martin or McDonnell Douglas, they represent a substantially higher proportion of company profits, for reasons that have been discussed already: 1) the products have already been researched, developed, and perfected at U.S. taxpayer expense, so the exporting firm has had to make a fairly minimal investment up front; 2) added costs for associated weapons, spare parts, and training can often double or triple the value of a major foreign contract; and 3) government assistance in marketing and financing overseas sales further reduces the costs to U.S. firms of making these deals. As a result of all of these factors, a number of prominent defense industry analysts on Wall Street have estimated that arms export growth markets like Asia may now account for a majority of the profits of a number of major U.S. defense contractors. As was noted in section IV, many of the arms deals with Asian countries involve transfers of U.S. technology and jobs to the recipient countries, so that the value of these transactions in revenues and profits to the company does not deliver a corresponding boost to defense industry jobs in the United States. On the assumption that one can never have too much of a good thing, the largest U.S. arms exporting firms have been pressing for even greater government assistance to ensure that their yearly billions in foreign military sales contracts continue to flow well into the next century. They have been remarkably successful in winning new subsidies from the Clinton Administration and the Republican-controlled Congress. Despite an extremely challenging budgetary environment, U.S. arms exporters had a banner year in 1995, winning a significant increase in government support and creating two new subsidy programs that could yield billions of dollars in additional federal assistance in the years to come: 1) a new $15 billion arms export loan guarantee fund; and 2) a repeal of hundreds of millions of dollars worth of annual R&D recoupment fees on foreign military sales. These changes can be traced in part to the pro-industry, pro-export stances of the Clinton Administration and the Republican-led Congress, but they did not spring full-blown from the minds of our elected leaders in Washington. The recent increases in subsidies for weapons sales were the fruits of a concerted seven year lobbying campaign by U.S. arms manufacturing firms. The campaign was spearheaded by organizations such as the Defense Policy Advisory Committee on Trade (DPACT) and the Aerospace Industries Association (AIA). It was also supported by powerful individuals such as Norman Augustine, the president and CEO of the Lockheed Martin Corporation; Democratic Senator Christopher Dodd of Connecticut, who also doubles as the chairman of the Democratic National Committee; and Republican Senator Dirk Kempthorne of Idaho, who spent a number of years prior to entering government service as a Vice-President for Governmental Affairs at the FMC Corporation, a diversified conglomerate that routinely ranks among the nation's largest arms exporting companies. The story of how the arms industry managed to squeeze more money out of the taxpayers to support weapons exports at a time of reduced threats to U.S. security abroad and increasing demands on scarce federal funding at home provides a revealing profile of special interest lobbying at its worst. Arms exporting firms have always sought additional government support for their activities whenever and wherever they could, but the history of recent initiatives to increase government financing for arms sales goes back to November of 1988, the month that George Bush defeated Michael Dukakis for the presidency of the United States. During that same month the Defense Policy Advisory Committee on Trade (DPACT), an industry advisory group that provides confidential recommendations to the Pentagon on arms trade issues, released a rare public document with the rather sleepy title of "A Report Outlining U.S. Government Policy Options Affecting Defense Trade and the U.S. Industrial Base." In the cover letter that was sent to the Pentagon with the report, DPACT Chairman Norman R. Augustine (who at the time was serving as Chairman and CEO of the Martin Marietta Corporation), it was presented as an effort to "assist the new Administration in identifying key defense trade and industrial base issues." As noted above in section III, the assistance offered was far from disinterested: DPACT's members include CEO's and top executives of virtually every major arms manufacturing and exporting firm in the United States, from the FMC Corporation to Lockheed to McDonnell Douglas, men whose companies stand to benefit financially if government subsidies for arms sales are increased or government controls over weapons exports are reduced. The cover letter noted that the report represented only one small manifestation of DPACT's ongoing access to government policymakers, and that the organization's real clout comes from its ability to meet with key officials behind closed doors to put forward industry's perspective on arms export issues: "For the past five years the thirty-five defense industry executives who comprise the DPACT have met regularly with the Secretary [of Defense] and the [U.S.] Trade Representative to identify defense trade and industrial base issues and provide a sounding board for new policy initiatives . . . We believe that this process, rather than any specific paper or report, is the key to DPACT's value."[81] Needless to say, the Secretary of Defense does not meet regularly with advocates of arms control, human rights, or economic development to get their input on arms sales policy, so DPACT provides the defense industry with a critical advantage in shaping government decisions in this area. DPACT's recommendations carried additional weight with the new Republican Administration because of the personal histories of the people making the proposals. Norman Augustine was extremely well connected in Republican circles due to his term of service as Undersecretary of the Army for Research and Development during the Nixon/Ford Administration; General Howard Fish of the Loral Corporation, who headed up DPACT's Export Policy Subcommittee, served as head of the Pentagon's Defense Security Assistance Agency during the Nixon, Ford, and early Carter years; and DPACT member Donald Atwood was soon to be tapped for a position as Undersecretary of Defense in the incoming Bush Administration. In fact, Augustine himself was briefly considered for Secretary of Defense by the Bush team. [82] Given the combination of industrial clout and personal connections represented by the DPACT member list, Bush Administration officials had a strong incentive to take their recommendations on defense trade issues to heart, and they did. The most significant recommendations in the report with respect to subsidies for arms sales were to "increase or hold level" traditional security assistance programs like the Foreign Military Financing program; to "remove the recovery of surcharges or non-recurring costs from exports financed from Security Assistance funds" [recoupment fees]; and to establish a new arms export loan guarantee fund to help finance sales to "countries such as Singapore, Malaysia, Indonesia, Colombia, Venezuela, Brazil, Peru and Thailand" that were viewed as "increasingly large markets for arms exports."[83] Getting these reforms through Congress and selling them to a voting public that was becoming increasingly skeptical of both arms sales and foreign aid programs was no easy matter, but the Bush Administration gave it the old college try, enacting two out of the three financing recommendations and making a strong but ultimately unsuccessful bid to obtain the third. On security assistance funding, the Bush Administration maintained support for grants and subsidized loans under the Pentagon's Foreign Military Financing (FMF) program at between $4.6 and $4.8 billion per year throughout its four years in office, in faithful execution of DPACT's proposal to resist any further cuts in these subsidies. On recoupment repeal, the administration took a slightly different approach than the one advised by DPACT, but the end result was equally beneficial to industry. Rather than going through the difficulty of getting the necessary legislation passed to repeal the fees on FMS sales handled by the Pentagon, Bush policymakers decided to waive recoupment fees on commercial sales licensed by the State Department, a move they could make administratively without passing a new law. As noted above, this change resulted in a net tax break/fee reduction to arms exporters and their clients of over $170 million per year. It was on the largest item on the DPACT agenda -- creating a new government-backed loan guarantee fund for arms exports -- that the Bush Administration ran into the most intractable political opposition. After several years of internal debate over how best to organize such a fund, a decision was made in late 1990 to provide the new financing through the Export-Import Bank, a government entity that had for the previous twenty years been restricted to funding exports of civilian products. By the time the administration was ready to announce the new plan, in March of 1991, government support for arms sales had become a dirty word in the public discourse as a result of revelations of the U.S. government role in supporting sales of militarily useful items to Iraq in the period leading up to the Persian Gulf War. The plan to use ExIm funds to back arms sales loans hit the front pages just a few weeks after President Bush had promised a joint session of Congress that he would move to limit the flow of arms to regions of tension like the Middle East in the wake of the Gulf Conflict. A spate of critical editorials followed closely after the announcement of the new ExIm plan, and a coalition of arms control, development, and human rights organizations was able to work with sympathetic members of Congress like Rep. David Obey (D-WI) and Sen. Paul Sarbanes (D-MD) to block the proposal. An unexpected helping hand in the fight to kill the ExIm military financing proposal came from companies like Boeing and Westinghouse, both of which feared that using ExIm funds for military exports might crowd out funding they hoped to use to sell civilian products like airliners or electrical generating equipment. The final legislative outcome was as close as it could get. One 1991 amendment to permit ExIm funding of military sales, offered by Sen. Christopher Dodd (D--CT) on behalf of defense exporters like the Sikorsky Helicopter unit of United Technologies based in his home state, lost in the Senate by just one vote; another version of the amendment passed the Senate but was eliminated in a House-Senate conference committee.[84] Despite this loss on the overall concept of ExIm funding for arms exports, two significant loopholes were passed into law during 1989 and 1990 that allowed some of the bank's money to go for specific weapons deals: a 1989 amendment to allow the use of ExIm funds in fighting against drug producers and drug cartels in nations like Colombia, which received an $86 million loan guarantee to purchase U.S. military helicopters as a result of the amendment; and a 1990 law pushed through by Sen. Dodd that allowed a one-time exception for ExIm financing of military sales to Greece and Turkey. In the true spirit of pork barrel politics, the Dodd provision was passed specifically to clear the way for a $1.4 billion ExIm loan guarantee for the sale of Sikorsky Black Hawk helicopters to Turkey.[85] So, while the industry won a few small battles on the arms loan guarantee front during the Bush term, they were not able to win their larger objective of establishing a permanent new source of loan guarantees for foreign weapons exports. Having lost on the first round, Norman Augustine and his colleagues in the defense industry came up with a new arms export financing plan that they pitched in the early months of the Clinton Administration. To avoid any controversy over possible diversion of ExIm funds from civilian-oriented export deals, the new proposal entailed creating a new, independent arms export loan guarantee agency that would be run out of either the Pentagon or the State Department. To make the costs more palatable, the industry proposed that the funds to be drawn from the President's proposed budget for the conversion of military industries and workers to civilian endeavors. The new proposal first surfaced in a February 12, 1993 letter from Aerospace Industries Association President Don Fuqua, an ex-Democratic Congressman from Florida and former chair of a science and technology panel in the House of Representatives, to his former colleague Les Aspin, who had moved on from a career serving on defense-related committees in the House to become President Clinton's first Secretary of Defense. Two weeks later, Fuqua's letter was followed up by a second one on the same topic, signed by Norman Augustine and eight other CEO's of major arms exporting firms. The Augustine letter urged Aspin to "include in your F.Y. 1994 budget submission a financing facility for defense exports," arguing that an "initial program of $5 billion in guarantees would require a 'subsidy' budget of $325 million." Lest the political implications of turning down the request be overlooked, the CEO's asserted that "such a program could provide employment for up to 200,000 defense workers, engineers, and scientists in the aerospace, shipbuilding, ground equipment, and electronics industries," arguing further that "this program would certainly be an appropriate part of any conversion or transition package" for the defense industry.[86] Despite this pressure campaign, Secretary Aspin opted not to include the loan guarantee fund in his budget request, so the lobbying campaign moved over to Capitol Hill. In an April 28, 1993 letter to members of the House Armed Services Committee, Norman Augustine made an even more expansive pitch for diverting economic conversion funding for use in promoting arms sales: "As the President and Congress explore how best to spend the $20 billion the President has proposed for defense conversion, I would urge consideration be given to converting some of our nation's tax and export policies which currently discriminate against the U.S. defense industry and jeopardize its ability to compete in the world marketplace. Such assistance would preserve defense jobs as opposed to assisting laid off workers."[87] Augustine's letter included a pitch for a scaled-down, $1 billion version of the arms export loan guarantee fund, as well as a plea to take legislative action to repeal the recoupment fees on Foreign Military Sales transactions as a follow-up to the Bush Administration's repeal of the fees on commercial arms sales. Unfortunately for Augustine and his cohorts in the arms export lobby, his misleading rhetoric about "converting" some of funds earmarked for creating civilian opportunities for defense workers and firms into a slush fund to promote weapons exports drew the outrage of a junior member of the Armed Services Committee, Tom Andrews (D-ME). As Andrews put it, "if he thinks this [subsidizing arms sales] is conversion we'd better have a debate on this and settle the issue right now." Andrews proceeded to work with Rep. John Kasich (R-OH) to pass an amendment in the fall of 1993 mandating that no conversion funding could be used to subsidize arms sales. So, Augustine and his colleagues shifted tactics once again: during 1993 and 1994, the industry worked to get support for a version of their proposal that would take the money for the reserve fund to back up the loan guarantees from other Pentagon accounts, but they were not able to get the Congress or the Administration to provide the funding. Finally, in late 1994, the arms industry put forward yet another version of the arms export loan guarantee fund, one that they claimed would not cost taxpayers a dime. Mindful of the difficulties of getting money appropriated for the reserve fund to cover bad loans, the industry came up with a plan under which the reserve monies would come from the foreign customer in the form of an up front fee. Despite opposition from key officials in the Clinton Administration, who indicated when asked that they did not believe that a new arms export loan guarantee fund was needed at this point, the industry finally succeeded in establishing an open-ended $15 billion loan guarantee fund by attaching appropriate amendments to both the House and Senate versions of the defense appropriations and authorization bills. When President Clinton decided to sign the defense appropriations bill in December of 1995, allegedly to ensure that he would have funds readily available to support his pending deployment of U.S. troops to Bosnia, the loan guarantee fund slipped into being along with the bill.[88] The arms export lobby's victory on the loan guarantee fund issue despite the Clinton Administration's opposition to the plan is indicative of the clout it can wield in Congress by playing up the issue of defense jobs in the districts of key Senators and Representatives. The Senate debate on the loan fund provided a snapshot of this process in action, as the key proponents of the arms export loan guarantees included not only the industry's chosen point man for the legislation, Republican Senator Dirk Kempthorne of Idaho (who, as noted above, is a former executive at FMC Corporation, a major arms exporting firm) but also moderate to liberal Democrats like Dianne Feinstein (D-CA) and Christopher Dodd (D-CT), who were interested in what the proposed fund could do to promote exports by companies based in their heavily defense dependent states. Dodd went so far as to go onto the Senate floor during the loan guarantee debate to brag about how his earlier amendment allowing ExImbank loans to fund a helicopter sale to Turkey had made a difference by supporting manufacturing jobs at his home state firm, Sikorsky helicopter: "In 1989, I was successful in getting a much narrower defense export financing program operational for 1 year -- fiscal year 1990. During the brief life of that program, a United States company -- Sikorsky -- won a highly competitive contract to sell Black Hawk helicopters to Turkey. That sale totalled $1 billion and enabled some people in my state to remain employed who might otherwise have lost their jobs -- that is not to say that significant numbers of Connecticut workers haven't been severely impacted by defense spending cutbacks."[89] Dodd neglected to mention that the helicopters in question -- Black Hawk troop transport aircraft -- have also "made a difference" in Turkey by being used in operations in which Turkish troops have bombed, burned, and evacuated Kurdish villages, killing innocent civilians in the process. While the Clinton Administration deserves some credit for opposing the new arms export loan guarantee program, the real test of its commitment will come now that the program has been authorized. Since it involves no budgetary outlays and there is no requirement that the fund actually be used, the President and the Secretary of Defense have the option of simply letting the fund die a slow death by refusing to utilize it in support of any foreign arms sale. As noted above in section III, if the fund is put to use it runs the risk of incurring hundreds of millions, if not billions of dollars in new obligations for U.S. taxpayers that will be incurred over time as some of the loans made under the government guarantees go bad. Making it easier for Third World governments to buy advanced weaponry would be both fiscally irresponsible and strategically unwise. It remains to be seen whether the Clinton Administration can resist industry pressure to tap into the new fund the first time a major potential sale comes along for which the loan guarantees might be used to sweeten the deal. On the other longstanding financial item on the arms industry's agenda, repeal of recoupment fees -- the fees charged to foreign arms buyers to reimburse the Treasury for the taxpayer investment expended in developing the weapon in question -- the Clinton Administration has been on industry's side from the outset, introducing legislation to repeal the fees on FMS sales every year it has been in office. Finally, in 1995, the administration was able to win a compromise victory over the objections of Congressional opponents of the plan like Rep. Howard Berman (D-CA). The President can now waive recoupment fees on FMS sales if he deems that it is "likely" that the deal will be lost otherwise, or if exports of the system will lower the price of Pentagon purchases of the same weapon. Since the Clinton Administration already supports repeal of the fees, it is likely to find the rationale it needs to waive them in most, if not all, cases. The one potential sticking point that might prevent industry and its clients from getting the full tax break they are seeking is a requirement for the President and the Congress to pass legislation in the F.Y. 1997 Pentagon budget that makes cuts to offset the approximately $170 million in revenues that would be lost if recoupment fees are waived on all FMS deals.[90] The lesson to be learned from the arms industry's successful seven year campaign to increase government subsidies for arms exports is that even relatively unpopular special interest initiatives can prevail given enough persistence, tactical flexibility, and inside lobbying on the part of a powerful industry. At a time when over 90% of the American people oppose U.S. government involvement in the arms trade and a majority of Americans reject spending on both foreign aid and subsidies to specific industries, the fact that the arms export lobby could win special tax breaks for weapons clients and create a new multi-billion dollar government program to promote weapons exports is indicative of its political clout and lobbying skill. In the final analysis, for all its sophistication and financial and political might, the arms industry may yet find that it has won a few skirmishes only to lose the larger war over federal budget priorities. As this report went to press, a bipartisan group of Senators led by Edward Kennedy (D-MA), John McCain (R-AZ), Russell Feingold (D-WI), and Fred Thompson (R-TN) was in the process of proposing the establishment of an independent panel to take up the question of reducing federal subsidies to private corporations. In addition, Republican deficit hawks like House Budget Committee Chairman John Kasich have been longstanding opponents of special subsidies for arms exporters, as have arms control-oriented progressives like the 50 members of the House of Representatives Progressive Caucus, chaired by Rep. Bernie Sanders (I-VT). As the cuts in social programs enacted in 1995 begin to hit home, and questions about shared sacrifice in the face of corporate downsizing and budgetary stringency are raised with greater force by the voting public, the question of why the U.S. government should spend over $7.6 billion per year to promote exports by one of the most heavily subsidized industries in the history of the nation -- the weapons industry -- should be high on the anti-corporate welfare agenda.[91]
VIII.
Selling Out: National Security Versus Private Gain
The last five times the United States has sent significant numbers of troops into combat -- in Panama, Iraq, Somalia, Haiti, and Bosnia -- U.S. forces faced adversaries who had received either U.S. weaponry, U.S. military technology, or military training in the period leading up to the conflict. The weakest case for the dangerous consequences of U.S. transfers to U.S. troops is in Bosnia, where most of the weaponry involved in the conflict came either from former Yugoslav army stocks, or from non-U.S. sources in Russia, Central Europe, the Middle East, and Asia. Nonetheless, some U.S.-supplied weaponry has probably found its way into the conflict in Bosnia. U.S. weapons sales to the former Yugoslavia totaled $163 million over a ten year period, and during one five year period (from 1987 through 1991) U.S. transfers accounted for 13% of Yugoslavia's total arms imports. In the other cases cited above, the role of U.S. weaponry and training is much clearer. The armed forces of Panama and Haiti were armed and trained with U.S. military assistance for many years. The United States vied with Italy to be the top weapons supplier to Somalia during the 1980s, before a civil war toppled the government and the weaponry supplied by the United States was divided up amongst the rival warlords that U.S. forces had to deal with when they arrived in Somalia on a peacekeeping venture in December of 1992. Iraq received $500 million worth of militarily useful technology from U.S. firms, much of which was put to work building advanced armaments for Iraqi forces, and Baghdad also received U.S. howitzer and cluster bomb technologies via third parties.[92] If commercial considerations are allowed to drive U.S. arms export decisionmaking, as they have done for much of the Bush and Clinton administrations, there is a high probability that U.S. forces will face even more sophisticated U.S.-supplied weaponry in some future conflict. Threat Creation and the Fueling of Regional Arms Races Current Pentagon strategy is based on the notion that the United States should be prepared to fight two major regional conflicts simultaneously, and to "project power into regions important to U.S. interests and to defeat potentially hostile regional powers, such as North Korea or Iraq."[93] By highlighting Asia and the Persian Gulf in its strategic planning, the Pentagon has inadvertently revealed the contradiction between U.S. arms export policy and U.S. defense strategy. Throughout this decade, the United States has been the largest arms exporter to both the Middle East and Asia, helping to fuel regional arms races in the process. Even when U.S. weaponry doesn't fall into the hands of a potential adversary, as happened with Iraq during the Gulf War, U.S. arms sales to allies in the Middle East or Asia spark corresponding purchases by their regional rivals, resulting in dangerous regional arms races. Sales to Saudi Arabia trigger new arms imports by Iran. Sales to Taiwan reinforce China's push to upgrade its military forces, and U.S. exports to Indonesia, Singapore, Thailand, South Korea, Malaysia, and Japan contribute to the continuing militarization of Southeast Asia. The net result of all this furious buying and selling of armaments -- a traffic which is dominated by U.S. firms -- is to ensure that when and if U.S. troops are deployed to either of these regions, they will face a more dangerous, more heavily armed adversary than would have been the case if U.S. policy had attempted to exert some control over the transfer of advanced armaments to these regions. A 1992 study by the Congressional Budget Office attempted to quantify the costs of unrestrained arms trafficking to the U.S. in the form of higher defense budgets, arguing that "limits on the size and sophistication of Mideast forces could reduce pressures to modernize U.S. forces," a move which "could save additional billions of dollars a year in defense budgets."[94] Since that study came out, concerns about the implications of conventional arms proliferation have increased within U.S. military and intelligence circles. In May of 1994, the Director of Naval Intelligence warned Congress that "the overall technical threat and lethality of arms still being exported have never been higher."[95] In March of 1995, the CIA's Nonproliferation Center weighed in on the topic as well, noting that "the acquisition of advanced conventional weapons and technologies by hostile countries could result in significant casualties being inflicted on U.S. forces or regional allies in future conflicts." The CIA further noted that part of the impetus for this proliferation would come from other nations efforts to keep up with the United States in the race to arm the globe: "as countries reliance on exports to maintain their defense industrial base grows, pressures will increase to export advanced conventional weapons and technologies to remain competitive with the United States in the world's arms markets."[96] And in the summer of 1995, the Defense Science Board, an industry advisory panel that provides guidance to the Secretary of Defense on technical and strategic issues, devoted its annual summer study group to the issue of how to deal with the spread of advanced conventional armaments to regions of conflict. Unfortunately, rather than taking the very real threat of conventional arms proliferation to U.S. security interests as a warning sign that it is time to exert some restraint on arms sales, government policymakers seem to be following the lead of industry, as exemplified in the Lockheed Martin Corporation's campaign to fund its new stealth fighter plane for the Air Force, the F-22. The company has published a glossy brochure for the aircraft -- which at $160 million per copy is the most expensive fighter plane ever built -- in which it argues that the plane is needed because we live in a "dangerous world" in which "worldwide weapons exports . . . have been spurred by economic necessity" and "advanced fighters, which equal or surpass current U.S. capability, are a key element of arms races at the regional level." The brochure builds to a crescendo of threat-mongering hysteria with a foldout map of the world listing "Foreign Countries With Advanced Fighter Aircraft." Lockheed Martin fails to emphasize one of the most interesting aspects of the map -- 24 of the 48 nations listed received their advanced fighters from the United States, in the form of Lockheed Martin F-16s or McDonnell Douglas F-15s or F-18s. To the extent that foreign fighter aircraft pose a potential threat to the United States, that threat has been created in substantial part by U.S. arms export policies. Rather than building a new, $160 million airplane to outperform the advanced planes that we are providing to dozens of foreign nations, it would be far cheaper and far safer for the United States to take the lead in limiting the spread of advanced fighter technology and other conventional weaponry to regions of potential conflict. But implementing such a policy would require standing up to the arms export lobby, and cutting back on its generous array of taxpayer subsidies.[97]
Notes
2. Recent studies on corporate welfare include Robert Shapiro, Cut-and-Invest: A Budget Strategy for the New Economy (Washington, DC: Progressive Policy Institute, May 1995); and Stephen Moore and Dean Stansel, "Ending Corporate Welfare as We Know It," Cato Institute, May 12, 1995. For background on the proposed commission to cut corporate welfare see Richard W. Stevenson, "Move in Senate Aims at Cutting Corporate Aid," New York Times, March 6, 1996; on the difficulties of getting cuts in corporate subsidies through Congress, see Jackie Calmes, "Bold Talk on 'Corporate Welfare' Cuts Fades as Political Campaigns Heat Up," Wall Street Journal, March 20, 1996. 3. For example, the Progressive Policy Institute study lists potential savings of $2.5 billion as a result of discontinuing "direct and indirect subsidies to foreign purchasers of U.S. defense products" in its list of corporate welfare cuts, but the subsidies for arms sales documented in this report total three times that amount. See Shapiro, op. cit., p. 20. 4. U.S. Department of State and U.S. Department of Defense, Congressional Presentation for Security Assistance Programs, F.Y. 1994, pp. 7-8. 5. See "Fact Sheet: Conventional Arms Transfer Policy," White House Press Office, (Washington, DC: February 17, 1995). 6. For a detailed account of President Bush's campaign 1992 arms sales binge, see William D. Hartung, And Weapons for All (New York: HarperCollins, 1995), pp. 275-285. 7. For background on the system of Government-Owned, Company-Operated (GOCOs) that are used to build planes like the F-15 and F-16, see Gordon Adams, Iron Triangle: The Politics of Defense Contracting (New York: Council on Economic Priorities, 1981), pp. 223-240. 8. Numbers on government procurement and R&D spending for weapons systems since 1981 are calculated by the author from U.S. Office of Management and Budget, Historical Tables: Budget of the United States Government 1996 (Washington, DC: U.S. GPO, 1995), pp. 45-47. 9. Congressional Budget Office, Reducing the Deficit: Spending and Revenue Options (Washington, DC: CBO, February 1995), p. 87. 10.Charles Sennott, "USA: Sales Superpower," Boston Globe, February 11, 1996. 11. Figures on Pentagon R&D spending on the F-16 and F-15 are calculated by the author from U.S. Department of Defense, Program Acquisition Costs by Weapons System, utilizing the annual editions from F.Y. 1974 through F.Y. 1995. Cost estimates on exports of the F-15 and F-16 are drawn from public documents such as Sarah Walkling, ACA Register of Arms Transfers (Washington, DC: Arms Control Association, March 1996) and interviews with Lockheed Martin and McDonnell Douglas officials. To arrive at the $34 billion figure for F-16 exports, the Lockheed Martin figure of 1,371 F-16s exported was multiplied by $25 million per plane (since this excludes upgrades, support, and associated weaponry, it is a conservative figure). 12. For the 400 plus F-15s, a similar rough estimate of $40 million per aircraft yields a total cost of $16 billion, hence the reference in the text to deals worth more than $15 billion. Statistics on government brokered and licensed arms deals are drawn from U.S. Department of Defense, Foreign Military Sales, Foreign Military Construction Sales, and Military Assistance Facts as of September 30, 1994 (Washington, DC: U.S. Department of Defense, 1995). 13. For an official account of the Pentagon's role at each stage of the Foreign Military Sales process, see Chapter 9, "The Foreign Military Sales Process," in U.S. Department of Defense, Defense Institute of Security Assistance Management, The Management of Security Assistance (Wright Patterson Air Force Base, Ohio: DISAM, 1991), pp. 162-194; for data on the total package cost of recent major arms deals like the F-15 sale to Saudi Arabia, see Sarah Walkling, "ACA Register of U.S. Arms Transfers," (Washington, DC: Arms Control Association, April 1995). 14. Figures on DSAA budget and personnel were provided by James Breglio, Comptroller, Defense Security Assistance Agency, and from the DSAA budget document "Security Assistance Funding by Organization and Type of Administrative Funds (FMS/FMF), F.Y. 1995 actual. 15. U.S. General Accounting Office, "Cost of Assistance and Sales," GAO/NSIAD-95-110R, March 2, 1995, p. 4. 16. U.S. Congress, Office of Technology Assessment, Global Arms Trade, OTA-ISC-460, (Washington, DC: U.S. GPO, June 1991), pp. 30-31. 17. Op. cit., note 14; and U.S. Department of Defense, Defense Security Assistance Agency, "Security Assistance Funding by Organization and Type of Administrative Funds (FMF/FMS), F.Y. 1993." 18. Information on membership and costs of DPACT are from United States Department of Defense and the United States Trade Representative, "Charter of the Defense Policy Advisory Committee on Trade," February 28, 1994. 19. See Lora Lumpe, "Arms and No Influence," Arms Sales Monitor, No. 27, Washington, DC, Federation of American Scientists, November 30, 1994; and Louis Samuelson, editor, The Management of Security Assistance, op. cit., p. 51. 20. Data on State Department personnel and funding devoted to arms sales related tasks are drawn from U.S. Department of State, Bureau of Political-Military Affairs, F.Y. 1996 budget request. 21. Figures on the percentage of U.S. arms sales accounted for by the Foreign Military Sales versus Commercial Sales programs, and on the size of the Commercial Sales program in recent years, are from Defense Security Assistance Agency, Foreign Military Sales . . . Facts, op. cit., note 12. 22. William D. Hartung, And Weapons for All (New York: HarperCollins, 1995), pp. 149-150. 23. Ibid., p. 151. 24. Thomas E. McNamara, "A Message to Industry," in U.S. Department of State, Bureau of Political-Military Affairs, Defense Trade News, Volume 6, Number 1, Washington, DC, October 1995, p. 9. 25. United States Department of State, Bureau of Political-Military Affairs, "Defense Trade Advisory Group Terms of Reference," April 7, 1994; and General Services Administration, Twenty-Third Annual Report of the President on Federal Advisory Committees, Fiscal Year, 1994 (Washington, DC: U.S. GPO, 1995), p. 39. 26. Data on how many DTAG members are defense industry executives is from David Isenberg, "We Arm the World," Washington Post, February 18, 1996; and "'Gucci Shoes' Calling the Shots," in Lora Lumpe, editor, Arms Sales Monitor, No. 30, July 20, 1995, p. 7. 27. United States Department of State, "Minutes of Defense Trade Advisory Group Plenary Meeting" (unclassified version), October 6, 1994, pp. 9-10. 28. William D. Hartung, "Welcome to the U.S. Arms Superstore," Bulletin of the Atomic Scientists, September 1993, pp. 20-26. 29. See Chapter 11, "Who Armed Iraq?", in William D. Hartung, And Weapons for All, op. cit. 30. Testimony of Stephen Bryen, Delta Tech Corp., at hearings on "U.S. Government Controls on Sales to Iraq," U.S. House of Representatives, Committee on Government Operations, Subcommittee on Commerce, Consumer on Monetary Affairs, September 27, 1990 (Washington, DC: U.S. Government Printing Office, 1991), pp. 34-37. 31. Charles Sennott, "Dual Use: Double the Money," Boston Globe, February 11, 1996, p. B5. 32. Charles Sennott, "U.S.A.: Sales Superpower," Boston Globe, February 11, 1996, p. B2. 33. U.S. Department of Commerce, Bureau of Export Administration, Export Administration Annual Report 1994 and 1995 Report on Foreign Policy Export Controls (Washington, DC: U.S. Department of Commerce, March 1995), p. II-75. 34. U.S. Department of Commerce, Bureau of Export Administration, Office of Strategic Industries and Economic Security, Pacific Rim Diversification and Defense Market Assessment, (Washington, DC: U.S. Department of Commerce, November 1994), p. 3. 35. Ibid., introductory letter. 36. Ibid., p. 33. 37. Ibid., p. 21. 38. Hartung, And Weapons for All, op. cit., p. 156. 39. William D. Hartung, "The Boom at the Arms Bazaar," Bulletin of the Atomic Scientists, October 1991. 40. Hartung, "Boom at the Arms Bazaar," op. cit.; Ann Walsh, "Department of Defense Participation at Air Shows," Federation of American Scientists, June 1, 1992; and R. Jeffrey Smith, "U.S. Helps Firms Push Arms Sales," Washington Post, May 8, 1992. 41. Public Law 102-84, Section 1082, "Limitation of Support for United States Contractors Selling Overseas," October 23, 1992. 42. Sources on air show costs include William D. Hartung, "Nixon's Children: Bill Clinton and the Permanent Arms Bazaar," World Policy Journal, Summer 1995; U.S. Department of Defense, "DoD Air Show Participation" and "DoD Air Show Costs, CY 1994-95," (fact sheets provided at the request of the Office of Rep. Howard Berman, April 9, 1996; Lora Lumpe, editor, Arms Sales Monitor, various issues, 1994/1995; and interview with public affairs office, Whiteman Air Force Base, Missouri (for B-2 flying costs). 43. "A Bird? A Batmobile?" International Herald Tribune, June 13, 1995 (front page photo and caption). 44. Hartung, Nixon's Children, op. cit.; and Vimula Vusan, "Central Command Chief Says Iran a Long-term Threat," Emirates News, March 20, 1995. 45. The full
cost estimates for U.S. participation in major air and weapons shows
are based on tallies of the number of U.S. aircraft and other weapons
systems officially participating in each show, drawn from Pentagon
memoranda to Congress and coverage in the mainstream and specialty
press (especially relevant issues of Jane's Defence Weekly). Each
major aircraft is estimated to cost $500,000 per plane to display,
which represents a conservative estimate of the full costs of leasing,
insurance, and maintenance for aircraft sent to air shows prior
to the low cost leasing policy implemented by the Bush Administration
in 1991. For shows like Asian Aerospace, Paris, and IDEX in which
major weapons systems like the B-2 bomber, aircraft carriers, and
combat frigates were sent to the show on so-called "training missions,"
the estimate includes the cost of running and maintaining the systems
while at the show, and getting them there and back. B-2 cost estimates
are cited above; on the aircraft carrier and frigate, estimated
operating costs are from the U.S. Navy department of public information.
For the ships, estimates include two days at full operating costs
(including fuel) for getting to and from the shows; days spent at
the shows are counted at one-half the average daily operating costs,
representing a generous allowance for the fact that fuel and other
operating costs are less when a ship is in port. 48. Data on the Foreign Military Financing program are from U.S. Department of State and U.S. Department of Defense, Congressional Presentation on Foreign Operations, F.Y. 1996 (Washington, DC: U.S. Department of State, 1995); rankings of Pentagon arms sales subsidies versus other programs of federal assistance to business are based on comparing this data with information contained in Table 3, "Selected Federal Spending Programs That Support Business, 1984 and 1995," in Congressional Budget Office, Federal Financial Support of Business, (Washington, DC: CBO, July 1995), p. 22. CBO excludes most national security-related programs from its assessment of business assistance, but a strong case can be made for including subsidies for arms sales as a form of business assistance, for the reasons detailed in this report. 49. U.S. Department of Defense, Defense Security Assistance Agency, report on the status of loans and loan guarantees issued under the Arms Export Control Act, January 27, 1995, released under the Freedom of Information Act and supplied by the Arms Sales Monitoring Project of the Federation of American Scientists. 50. William D. Hartung, "No Welfare for Arms Merchants," New York Times, November 26, 1995. 51. United States General Accounting Office, Security Assistance: Need For Improved Reporting on Excess Defense Article Transfers (Washington, DC: GAO/NSIAD-94-27, January 1994), p. 19. 52. Ibid., pp. 30-31. 53. U.S. General Accounting Office, Foreign Aid: Potential for Diversion of Economic Support Funds to Unauthorized Use (Washington, DC: GA)/NSIAD-87-70, January 1987), p. 3. 54. Ibid., pp. 3, 22. 55. Data on Economic Support Funds are from Congressional Presentation on Foreign Operations, op. cit.; and U.S. Department of State, budget office. 56. Congressional Budget Office, Reducing the Deficit: Spending and Revenue Options, (Washington, DC: CBO, February 1995), p. 87. 57. U.S. General Accounting Office, Military Exports: Recovery of Nonrecurring Research and Development Costs (Washington, DC: GAO/NSIAD-95-147, May 1995), pp. 3-5. 58. Ibid., p. 5; and Congressional Budget Office, Reducing the Deficit, op. cit., p. 86. 59. GAO, op. cit., p. 5. 60. U.S. Department of Defense, Office of the Undersecretary of Defense (Acquisition and Technology), World-Wide Conventional Arms Trade (1994-2000): A Forecast and Analysis (Washington, DC: U.S. Department of Defense, December 1994), p. v. 61. Figures on the value of the loan guarantees to Turkey are from U.S. Export-Import Bank, Office of Business Development; on the use of U.S. aircraft in Turkey's war against its Kurdish population, see William D. Hartung U.S. Weapons at War (New York: World Policy Institute, 1995), pp. 9-12; and Human Rights Watch Arms Project, Weapons Transfers and Violations of the Laws of War in Turkey (New York: Human Rights Watch, November 1995). 62. "Ex-Im Bank Supports $5.7 Billion in Exports to Latin America," Ex-Im Bank news release, November 16, 1994; Matt Moffett, "Raytheon Deal is Clouded by Tape of Bribe Discussion," Wall Street Journal, November 20, 1995; Diana Jean Schemo, "Scandal Over Plan for U.S. Company to Monitor Brazil's Amazon," New York Times, November 21, 1995. The $1.4 billion estimated value of the ExIm guaranteed loan to Brazil is from U.S. Export-Import Bank, Office of Business Development, op. cit., note 61. The estimate of $125 million in subsidy costs for the $2.7 billion in military-related ExIm Bank loans to Turkey and Brazil are based on a conservative assessment of the possibility that the loans will generate taxpayer costs via late payments and/or default. According to the office of the Comptroller at the Ex-Im Bank, the $1.4 billion guaranteed loan to Brazil alone was assessed at an official "subsidy value" of more than 18% of the total value of the loan, or $254.4 million. However, since the official subsidy value is an imprecise measure used principly for budgetary planning purposes, for purposes of this report a substantially smaller subsidy value of $125 million was assigned to cover both the Turkish and Brazilian loans, a total less than 5% of the total value of the two loans. 63. Joseph Fitchett, "Ignoring EU Solidarity, Dutch Opt for U.S. Helicopters," op. cit.; and "U.S. Exporters Face Greater Offset Demands," Jane's Defence Weekly, April 24, 1996, p. 5. 64. William D. Hartung, "Nixon's Children," op. cit.; Randy Barber and Robert E. Scott, Jobs on the Wing: Trading Away the Future of the U.S. Aerospace Industry (Washington, DC: Economic Policy Institute, 1995), pp. 37-40. 65. Background on production sites for the F-16 is based on Lockheed Martin documents and interviews with officials working in the public relations and industrial process engineering departments at Lockheed Fort Worth, as well as company documents and numerous articles in the defense industry press. On Japan's possible interest in exporting the FSX, see Steve Glain, "Concern Over Menace Dissipates as Japan, U.S. Unveil Fighter Jet," Wall Street Journal, March 22, 1996. 66. Barber and Scott, op. cit., p. 40; and U.S. General Accounting Office, Asian Aeronautics: Technology Acquisition Drives Industry Development (Washington, DC: GAO, May 1994), p. 12. 67. Fort Worth job figures provided by Lockheed Martin, Fort Worth, Department of Industrial Process Engineering. 68. Barber and Scott, op. cit., pp. 37-38. 69. Charles Sennot, "In These Deals, American Workers Pay," Boston Globe, February 11, 1996. 70. U.S. General Accounting Office, Military Exports: Concerns Over Offsets Generated With U.S. Foreign Military Financing Program Funds (Washington, DC: GAO/NSIAD-94-127, June 1994), p. 5. 71. "McDonnell Douglas Commits $770 Million in Offsets," Jane's Defence Weekly, February 7, 1996, p. 15. 72. Estimate by the author, based on assumption of 25,000 jobs created per $1 billion spent on arms sales and offset arrangements, and calculation of 25% to 50% average offset on all U.S. arms sales and $7.5 billion in U.S. government subsidies for arms exports, resulting in a net benefit to the U.S. economy from arms sales ranging from plus $2 to $3 billion per year to minus $2 to $3 billion per year. More precise estimates would require better reporting on the details and timing of offset arrangements. 73. "UAE Raises Basing Doubts," Jane's Defence Weekly, November 25, 1995, p. 19. 74. Jobs estimate by the author, based on the assumption that the $7.6 billion now spent on arms export promotion would be divided equally amongst investments in education, housing, health care, and mass transit. 75. Figures on Head Start and the low income housing tax credit are based on U.S. government estimates of the costs and impacts of those programs. 76. Estimates on environmental export promotion and opportunities as compared with subsidies for arms exports are drawn from Miriam Pemberton and Greg Bischak, "Picking Losers: Arms Exports Dwarfed by Green Market Potential," in The New Economy, Washington, DC, National Commission on Economic Conversion and Disarmament, May 1995. 77. Pentagon projections of the value of future U.S. arms sales are drawn from Congressional Presentation on Foreign Operations, op. cit., pp. 484-485; and U.S. Department of Defense, Worldwide Conventional Arms Trade, op. cit., p. 46. 78. United Nations Development Programme, Human Development Report 1994 (New York: Oxford University Press), pp. 50 and 54. 79. David Wessel, "Global Defense Cuts Could Be a Big Boon to Living Standards," Wall Street Journal, September 24, 1993; and Project on Demilitarization and Democracy, What's the Link Between Starvation in Somalia and a Weak U.S. Economy? (Washington, DC: PDD, 1993). 80. U.S. General Accounting Office, Security Assistance: Update of Programs and Related Activities (Washington, DC: GAO/NSIAD-89-78FS), pp. 88-89. 81. Defense Policy Advisory Committee on Trade, Report Outlining U.S. Government Policy Options Affecting Defense Trade and the Industrial Base (Washington, DC: U.S. Department of Defense and the U.S. Trade Representative, November 1988), letter of submission (inside front cover). 82. For a profile of Howard Fish, see Hartung, And Weapons for All, op. cit., pp. 155-158; on Norman Augustine, see official Lockheed Martin bio of Augustine, 7/25/95. 83. Defense Policy Advisory Committee on Trade, op. cit., p. 22. 84. For a detailed accounting of arms industry lobbying efforts on behalf of arms export loan guarantees and the repeal of recoupment fees, including a recent history of Congressional action on these matters, see Project on Demilitarization and Democracy, Hostile Takeover: How the Aerospace Industries Association Gained Control of American Foreign Policy and Doubled Arms Transfers to Dictators (Washington, DC: PDD, November 1995); see also Lora Lumpe, ed., Arms Sales Monitor, op cit., various issues, for ongoing coverage of the loan guarantee and recoupment issues. 85. "Economic Costs of Arms Exports: Subsidies and Offsets," Testimony of Lora Lumpe, Director, Arms Sales Monitoring Project, Federation of American Scientists, before the Subcommittee on Foreign Operations, Appropriations Committee, U.S. Senate, May 23, 1995. 86. Copies of the Fuqua and Augustine letters are in the possession of the author. 87. Letter of Norman Augustine to Rep. Thomas Andrews, April 28, 1993. 88. "'Fiscally Conservative' 104th Congress Grants Billions in New Arms Export Subsidies," in Lora Lumpe, ed., Arms Sales Monitor, No. 32, March 5, 1996, p. 5. 89. Congressional Record -- Senate, August 3, 1995, p. S11300. 90. Arms Sales Monitor, op. cit., note 87. 91. See Richard Stevenson, op. cit., note 2. 92. Hartung, U.S. Weapons at War, op. cit., pp. 25-31, 44. 93. Secretary of Defense Les Aspin, Report on the Bottom Up Review, October 1993, p. 7. 94. Congressional Budget Office, Limiting Conventional Arms Exports to the Middle East, (Washington, DC: U.S. Government Printing Office, 1992), p. 72. 95. Lora Lumpe, ed., Arms Sales Monitor No. 28, February 15, 1995, p. 1. 96. Lora Lumpe, ed., Arms Sales Monitor No. 30, July 20, 1995, p. 8. 97. The F-22 Air Superiority Fighter: Peace Through Conventional Deterrence, Lockheed Corporation, Marietta, Georgia, March 1994, pp. 5, 7-8.
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Finding 1: Federal
subsidies for arms exports have jumped from $7.0 billion in F.Y.
1994 to $7.6 billion in 1995, an increase of 8.5%. This represents
the second largest subsidy program for business in the entire federal
budget (after agricultural price supports).
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