Top Ten Arms Export Subsidy & Transparency Issues, 1996

The following reforms will increase the amount of information that is available to Congress, the media and the public on U.S. arms sales; streamline U.S. arms sales programs to make them easier to monitor and control; and reduce the billions of dollars in governmental subsidies that are now being provided to support weapons exports. Three of these items () were enacted into law in 1996.


check 1. Reinstate section 657 to the Foreign Assistance Act (FAA). Section 1324(c) of P.L. 104-106 reinstated this report for 1996-97 (now under Section 655 of the FAA), while Section 148 of P.L. 104-164 mandates this report in perpetuity for each fiscal year. The first publication of this report was released in September 1997. Click here for more information.

2. Require arms sales notifications under sections 36(b) and 36(c) of the Arms Export Control Act (AECA) to be published in their entirety in the Congressional Record. Section 155 of P.L. 104-164 added subsection (e) to section 36 of the AECA, requiring the President to publish these notifications in the Federal Register. The Government Printing Office's homepage provides the current day's Federal Register as well as a searchable database of past issues.

3. Establish a reporting requirement on all coproduction deals. Section 1045(a) of P.L. 104-201 amended section 36(a) of the AECA to require a quarterly report on all newly concluded government-to-government agreements regarding foreign coproduction and all other commercially negotiated agreements involving coproduction or licensed production outside of the United States of defense articles of U.S. origin.

Reducing Subsidies

Issue 1. Reinstate section 657 to the Foreign Assistance Act.

Background/rationale. Until 1980 annual reports mandated by section 657 of the Foreign Assistance Act of 1961 provided a detailed breakdown of U.S. arms exports (both FMS and commercial deliveries). The report included all munitions (from bullets to bombers) exported to each country in the preceding year, including make, model and quantity.

The Reagan Administration repealed section 657 in 1981. Now it is practically impossible to find out what the U.S. is exporting, particularly in terms of small arms and spare parts. The only way to get such information is through Freedom of Information Act (FOIA) requests. The response to FOIA requests is uneven: some requests for information are fulfilled, while others, seemingly randomly, are denied.

It is stated policy of the Clinton Administration—as outlined in a White House fact sheet of 17 February 1995—to promote transparency in transfers of conventional arms.

Sen. Leahy questioned Under Secretary of State Lynn Davis about reinstating this report during FY95 foreign aid hearings. She said at that time that she knew of no reason why they could not be reinstated. Nevertheless, Sen. Leahy did not reinsert the provision in the foreign operations appropriations bill.

The House International Relations Committee reinstated the requirement for the 657 report in its FY96 foreign aid authorization as a non-controversial amendment; however, the bill was not completed.

Getting these reports re-established would aid public and Congressional oversight tremendously.

[Note: The reinstatement of section 657 would require the repeal of section 38(e) of the Arms Export Control Act, which incorporates section 12(c) of the Export Administration Act. These provisions of law are currently cited by the State Department as prohibiting the release of any information to the public about direct commercial weapons sales it has approved for export.]

Cost/savings to taxpayers. Costs would be marginal, given that the required data is already collected by the relevant government agencies. There would be minimal additional cost involved in regularly reporting this information. The cost in staff time of responding to multiple FOIA requests for this information would be greatly reduced.

Issue 2. Require arms sales notifications under sections 36(b) and 36(c) of the Arms Export Control Act to be published in their entirety in the Congressional Record.

Background/rationale. 36(b) and 36(c) notifications are currently referred by the Speaker of the House to the House International Relations Committee and by the President Pro Tem of the Senate to the Senate Foreign Relations Committee. This means in effect that only 43 members out of 435 in the House and 18 out of 100 in the Senate might possibly know what the U.S. government is planning to export to whom.

Currently, under the "Executive Communications" section of the Congressional Record, interested parties can find out only that the Pentagon has transmitted notice of a proposed sales contract to a particular country for some unnamed "defense articles and services."

For the interested public to find out more, it must place a Freedom of Information Act request with the Defense Department. Receiving the specifics contained in the unclassified Congressional notification by mail will take well over a month, by which time the Congressional review period for the sale will have elapsed.

From 1980-1986 the chairman of the Senate Foreign Relations Committee routinely placed arms sales notifications in the Congressional Record in their entirety, thus ensuring that all members of Congress, as well as the concerned public gained timely access to this information. This practice was ended when the Democrats took over the Senate in 1987.

Re-initiating this practice would be very good policy: It would be an extremely cost-efficient way of informing in "real time" all members of Congress—and the public—of weapons the Executive Branch is proposing to sell or license to foreign governments.

If they were printed in the Congressional Record, Thomas—Congress' on-line service—would publish the sales notices on the internet, making the information accessible to millions.

Cost/savings to taxpayers. There would be no appreciable cost to publishing this information. The cost in staff time of responding to multiple FOIA requests for this information would be greatly reduced.

Issue 3. Establish a reporting requirement on all coproduction deals.

Background/rationale. The Defense Security Assistance Agency and State Department should report to Congress (HIRC/SFRC and HNSC/SASC) on a quarterly and annual basis all agreements to license the production of weapons systems and major components to foreign countries.

Sen. Feingold introduced a provision in the FY94 foreign aid authorization (section 310(a) of S.1467) which would have amended the Arms Export Control Act to mandate that the quarterly reports due under section 36(a) include information on all government-to-government agreements for the foreign coproduction of defense articles of U.S. origin. The report would have included the foreign countries or organizations involved, a description and estimated value and quantity of the articles authorized to be produced, the restrictions on third-country transfers and a description of controls incorporated into the agreement to ensure compliance with this. Section 310(b) would have created a new section 32 in the Arms Export Control Act, to establish sanctions against foreign countries or firms that violate the third-country re-transfer restrictions.

The foreign aid authorization languished, and Sen. Feingold did not reintroduce the provision into the State Dept authorization bill as he did several of his other offset-related provisions.

The Feingold language was excellent; the only change necessary is to include direct commercial coproduction deals in the reporting requirement, as well.

The security implications of establishing more arms production capacity in other countries, as well as the impact on our own arms industrial and employment base, make this provision necessary. Congress and the public must be fully informed about arms production technology being exported abroad.

Cost/savings to taxpayers. Some initial costs would be incurred in setting up the data gathering and reporting systems, but costs to taxpayers would be marginal thereafter.

Issue 4. Amend recent legislation to make offset notifications routine and public. Publish these offset agreements in the Congressional Record as part of the 36(b) and 36(c) notices.

Background/rationale. As maintenance of jobs and the military industrial base has become a primary justification for U.S. weapons exports, offset agreements—the largely unregulated and secretive side deals which accompany arms sales—deserve increased attention. Through these side deals, a buyer seeks economic benefits to "offset" the cost of an arms purchase. Typical offsets include licensed or joint production of a weapon or its components; counter-trade, in which the seller agrees to purchase or market some of the buyer's goods; or capital investment in the purchasing country.

Sellers use offsets to win sales in today's competitive market. But the General Accounting Office (GAO) has reported that offsets "reduce the employment, defense industrial base, and other economic benefits that normally accrue to the United States from weapons exports. Certain types of offsets have resulted in a loss of some production work and business for U.S. prime contractors and subcontractors as well as for companies in non-defense businesses." [GAO/NSIAD-94-127]

A provision contained in the FY94/95 Foreign Relations Authorization Act (P.L.103-236), requires that the State and Defense Departments disclose to Congress in 36(b) and 36(c) notifications whether offsets will accompany the proposed arms sale. When offsets are indicated, members of the SFRC/HIRC may request information from the manufacturers on the specific offsets under consideration.

This provision was intended to ensure that Congress receives timely notification so that it can more accurately assess the net "jobs" impact of potential sales under review. However, because the legislation requires members of the key committees to be pro-active—writing to the manufacturer—the specific information comes too late to impact Congress' 15 or 30-day review of proposed arms sales.

Moreover, under the new law information on offsets is not made publicly available, since offsets are considered "confidential business information." Offsets impact directly on the American employment and technology base. The American public deserves to know what is being traded away in order to make arms sales.

This law should be amended to make the provision of information on offsets a routine part of the regular 36(b) and 36(c) notices. It should further be amended to allow the public access to this information. Information on offsets should be printed in the Congressional Register with arms sales notifications.

Cost/savings to taxpayers. There would be no appreciable cost to publishing this information. The cost in staff time of responding to multiple FOIA requests for this information would be greatly reduced.

Issue 5. Prohibit the provision of offsets on weapons exports funded or financed by U.S. military aid.

Background/rationale. Every year, the U.S. government gives away nearly $4 billion in Foreign Military Financing (FMF) grants and loans. Except for $475 million of Israel's annual $1.2 billion of aid, all of this must be spent on American-made weapons, meaning that such sales are not subject to international competition—the usual rationale for offsets. Nevertheless, current laws and policies do not prohibit offsets on FMF-financed sales.

In 1994 GAO examined 48 sales to the four largest FMF recipients—Israel, Egypt, Turkey and Greece over an unspecified time period. These contracts, valued at $11.6 billion and paid for with U.S. military aid, included offsets worth at least $4.7 billion, effectively increasing the assistance to $16.3 billion. [GAO/NSIAD-94-127]

GAO reported that, according to "knowledgeable" Pentagon officials, "No other arms supplier has a program that provides a combination of grant aid and allows offsets." Therefore, "it is unlikely U.S. contractors would lose sales to foreign competitors if they could not provide offsets in sales funded with U.S. grant aid."

As such, GAO suggested that Congress consider amending the relevant laws "to prohibit the use of FMF grants [and possibly FMF concessional-rate loans] to pay for or request, require, obtain or provide offsets in connection with sales of U.S. military goods and services." This prohibition could be enforced, said GAO, by requiring U.S. contractors to certify that they will not provide offsets, and by requiring FMF recipients to certify, as a condition of the aid, that they will not require offsets.

A House Energy and Commerce subcommittee held a hearing on the issue in 1994 ("Military Offsets," serial no. 103-138). Some subcommittee members suggested that taxpayer-financed offsets should be maintained if they support overall U.S. foreign policy goals, such as aiding the Israeli defense industry. In response, GAO pointed out that there is a current overcapacity in global arms production, and that the downsizing of the American defense industry is costing many American jobs.

Organized labor strongly opposes offsets. Conservative taxpayer groups would likely also oppose the practice.

Cost/savings to taxpayer. It is impossible to calculate how much this provision would save U.S. taxpayers, but according to the GAO's findings, it would be in the range of billions of dollars over several years.

Issue 6. Abolish the State Department's licensing program for direct commercial sales; consolidate all arms exporting into the Pentagon's Foreign Military Sales program.

Background/rationale. The United States has two separate channels for selling weapons abroad—Foreign Military Sales (FMS) and Direct Commercial Sales (DCS). In FMS, the government (represented by the Defense Security Assistance Agency) negotiates arms sales with foreign governments, buys the weapons from manufacturers and oversees shipment. In DCS, arms manufacturers broker deals directly with foreign corporations or governments, and the State Department's Office of Defense Trade Controls licens es the exports.

FMS has historically accounted for the majority of U.S. arms exports. In recent years, however, the dollar volume of DCS licenses has skyrocketed, with multi-billion dollar deals of sophisticated weapons cleared for export. In FY89, more arms were exporte d through DCS than FMS. Buyers are turning to DCS because the commercial route is quicker ("less red tape," according to one seller), cheaper, more covert and entails less government oversight.

The Pentagon is much more open about FMS than the State Department is about DCS. Specific information on DCS (such as quantity and type of weapons to be exported, manufacturer, dollar volume of the contract, and offsets) is considered "confidential busin ess information" and, while not classified, is unavailable to the general public. Even the total dollar volume of exports licensed by the State Department in a given year is hidden from the public.

Direct Commercial Sales—as the name implies—are treated basically as business deals: If the licensing paperwork is filled out properly, and if there is no overriding foreign policy or national security reason to block an export, a license will be granted. FMS foster close ties between the U.S. and foreign militaries. By definition, DCS receive less government oversight than FMS. Moreover, within the past few years, several government reports have sharply criticized the State Department's management of D CS, including woefully inadequate end-use checks.

Having two sales channels increases the difficulty of accurately quantifying U.S. arms exports in a given year. DCS are routinely omitted from arms trade statistics. For example, the Congressional Research Service, which annually publishes the most detai led and timely information on arms exports to the Third World, does not include DCS in its figures for U.S. sales because of the difficulty of obtaining this data.

In addition, regulatory differences between the two programs are played off against each other and used to bring legal restrictions down, and government assistance and subsidies up to the highest common level. And having two separate sales programs—run b y two entirely different bureaucracies—is unnecessarily costly.

For all of these reasons, the State Department's licensing function for direct commercial exports should be ended, and all U.S. arms exports should be run through the FMS program.

Cost/savings to taxpayers. This provision would save at least $4 million per year, the current budget of the State Department's Office of Defense Trade controls.

Issue 7. Prohibit funding procurement of new weapons through proceeds from arms sales.

Background/rationale. In January 1994, the Air Force disclosed plans to fund procurement of new F-16C/D model fighters through the sale of older F-16A/B planes. Sales of some 360 F-16A/Bs would reportedly finance 88 new F-16C/D for the U.S.A.F. Countries under consideration to receive the older planes include Egypt, Malaysia, Morocco, New Zealand, Singapore, South Korea, Thailand, Tunisia and East European countries.

Without Congressional approval, this plan would not be constitutional. It would usurp Congress' power of the purse.

Congress has approved this sort of financing proposal before. In the FY93 DOD authorization bill, Congress permitted the Army to use $197 million from the sale of excess M48 and M60 tanks for the M1 tank upgrade program. The act also allowed the use of $15.2 million from the sale of M113A2s for the procurement of Bradley Fighting Vehicles. In the FY94 DOD authorization bill the HASC suggested that the Navy sell excess MK-46 torpedoes and use the proceeds to offset the costs of buying the MK-50 Advanced Light Weight Torpedo.

When it was disclosed in 1991 that China had a policy of funding new procurement through arms exports, the western press and policy makers expressed outrage and hysteria. Similarly, Russian plans to finance arms industry conversion through the proceeds fr om arms sales was heavily criticized by U.S. government officials. In both cases, U.S. officials feared that such a financing scheme would create a dangerous incentive to sell weapons indiscriminately. They were right. The United States should not set such a precedent. Congress should bar procurement of new arms through arms sales.

Cost/savings to taxpayers. While using arms sales proceeds to fund new weapons procurement might seem like a good deal for taxpayers, the downstream costs of such a policy are potentially enormous. If other countries follow suit, taxpayers will b e forced to fund higher levels of Pentagon spending to counter the threats created by a much more highly militarized world.

Issue 8. Consolidate all government financing of weapons sales in the Foreign Military Financing program. Eliminate the newly created Defense Financing Facility, and prohibit the use of Export-Import Bank funds to finance exports of military equipment.

Background/rationale. Since the 1970s, the United States has financed sales of American-made weaponry through the Foreign Military Sales Financing (FMF) program. FMF is administered by the Pentagon and State Department. Congress appropriates FMF annually in the foreign aid appropriations bill. Through FMF, the United States will finance nearly $4 billion of arms exports in FY 1996. The vast majority of this aid was outright grants, with $600 million of loans also provided.

Opposition to foreign aid has increased in the past few years, resulting in reductions in military aid outlays and restricting this year's $4 billion to only a handful of countries.

The arms industry's response has been to seek new channels for financing arms sales. They have sought and achieved increased financing by the Export-Import Bank of weapons sales, as well as the creation of a new loan guarantee program at the Pentagon. T he latter, called the "Defense Finance Facility" (DFF) by industry, is separate from the FMF program, which already has the authority to guarantee loans.

Industry argues that government guarantees for commercial loans through the DFF and EXIM would finance arms exports on the cheap. But guarantees are needed precisely because the recipient is a credit risk, unable to obtain affordable commercial loans on its own. Many past weapons loans financed by the government have gone bad, resulting in much higher costs to taxpayers than initially stated. In fact, the DOD shifted from loans into a largely grant military aid program in the early 1980s because U.S. a llies were not meeting their debt payments. In 1990, the U.S. wrote off $7 billion of Egyptian military debt. Under the DFF, U.S. taxpayers could get stuck with up to $15 billion of bad debt.

These two new financing channels are creating potential large liabilities for U.S. taxpayers.

Moreover, it is smoke and mirrors to bury new military aid programs in the Pentagon budget and in the EXIM Bank budget, while at the same time cutting such funds from the foreign assistance budget. All arms export financing should be consolidated in one program.

Cost/savings to taxpayers. The consolidation would save money by eliminating redundant bureaucracies.

Issue 9. Prohibit the use of government funds at international arms bazaars.

Background/rationale. Up until 1991, U.S. arms manufacturers paid the U.S. Treasury to borrow, transport and insure Pentagon-owned weapons for marketing display to foreign customers. However, since the 1991 Paris Air Show, the military services have flown or shipped U.S. military equipment to shows at no cost to industry.

The General Accounting Office reported in March 1993 that Pentagon participation at six arms bazaars since 1991 cost taxpayers over $3.5 million. An additional $2 million was spent in 1994-95. Taxpayers also picked up the $18.9 million tab when the Mari nes crashed an AV-8B aircraft returning from the 1992 Singapore air show.

Opposed to the use of taxpayer funds for arms marketing, Rep. Howard Berman and Sen. Joseph Biden sponsored a provision in the FY93 DOD authorization bill requiring a "national security" certification before direct DOD participation at arms bazaars is per mitted. Rep. Berman's original language would have banned government funding and participation at arms shows, with no "national security" certification/waiver. His position was weakened in the House-Senate conference on the issue.

The Defense Department has now made the claim on at least seven occasions that marketing weapons at overseas arms bazaars is a matter of national security. The principal justification cited has been to out-compete our European allies. However, such marke ting assistance by the U.S. government will probably result in increased marketing assistance by European governments to their industry. Moreover, other U.S. industries do not enjoy this kind of government-aided marketing. As the 1992 wreck demonstrates , the potential costs of this policy are quite large.

Given the Pentagon's willingness to make routine, bogus certifications of national security exigency, an outright ban on U.S. taxpayer funding for arms bazaars is necessary.

Cost/savings to taxpayers. This provision would save taxpayers at least $1-2 million per year.

Issue 10. Repay taxpayers for public funds expended to research and develop weapons which are exported abroad. Require recoupment fees on all sales of major military equipment .

Background/rationale. American taxpayers underwrite research and development costs of weapons systems for U.S. forces. The Pentagon spends over $30 billion of public money annually to develop arms.

Since the 1960s, the DOD has as a matter of policy added a recoupment charge to both industry-negotiated direct commercial sales and to government-negotiated Foreign Military Sales (FMS) in order to recover part of the cost to the public of developing the weapons. The fees average five percent of the weapon's value, and the recouped money is returned to the Treasury as general revenue (deficit reduction). In 1976, the requirement that these fees be added to FMS of major equipment was enacted into law (A rms Export Control Act, section 21(e)(1)(B)). A similar requirement was not legislated for direct commercial sales.

In 1992 the Bush Administration abolished recoupment fees on direct commercial arms sales. Since then, the administration and industry have argued that recoupment fees on FMS must be repealed to restore equal treatment between the two programs. Mainta ining recoupment fees on FMS but not on direct commercial sales makes government-negotiated sales more expensive. The Pentagon argues that without equal treatment, buyers will go the commercial route, which entails less government oversight.

A more fiscally sound way to restore equal treatment—and to channel buyers back toward government-negotiated sales—would be to reinstate recoupment fees on commercial sales. Recoupment fees are not a tax on arms exports; they are a reimbursement to taxpayers. Without recoupment fees on export sales, U.S. arms manufacturers and foreign customers are receiving a direct and massive subsidy from U.S. taxpayers. Because they do not have to absorb R&D costs and the cost of establishing the production line, arms manufacturers make a handsome profit on exports of weapons systems. Because they do not have to pay any portion of the weapon development costs, foreign customers also r eceive a substantial benefit, at the expense of U.S. taxpayers.

Industry lobbies against recoupment fees by arguing that the fees raise the price of U.S. weapons and make them less competitive on the international market. However, according to the Congressional Research Service, the U.S. cornered 70 percent of the sal es market in 1993. This figure included only government-negotiated sales, which had a recoupment fee applied to them.

Cost/savings to taxpayers. The exact amount of savings in a given year would depend on the amount of arms sales made. However, the General Accounting Office has estimated that if recoupment fees were charged on all arms sales, at least $500 mill ion per year would be returned to the Treasury.

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