Abolish 'Corporate Welfare' for Manufacturers of Weapons

by Lora Lumpe

Defense News 24-30 April 1995.


While cutting back on lunches for school kids, heat for the elderly and care for veteran's, Republicans in the House of Representatives are proposing to grant U.S. arms manufactures a new subsidy worth hundreds of millions of dollars annually.

The Federal Acquisition Reform Act of 1995, introduced in late February, would eliminate a fee on foreign arms sales currently required by law to recover tax-payer-funded research and development costs.

The White House, which has been attacking GOP-sponsored "corporate welfare," supports the proposal.

As Wendy Sherman, assistant secretary of state for legislative affairs, explains, the measure is "fully consistent with President [Bill] Clinton's economic agenda, particularly its interest in assisting the U.S. defense industry to adjust to declining DOD budgets."

Industry has lobbied vigorously against the fee since 1991, arguing it raises the price of U.S weapons and makes them uncompetitive in the arms bazaar.

However, U.S market dominance belies such claims; according to the Congressional Research Service, the United States secured more than 70 percent of all new sales agreements in 1993.

The Pentagon spends more than $30 billion of public money annually to develop weapons for U.S. forces. Because they do not have to pay these costs, manufacturers realize a handsome profit when they sell weapons abroad.

To recover some of this tax-payer subsidy, the Arms Export Control Act has required since the 1970s that recoupment fees be charged on government-negotiated exports of major military equipment.

The fees range from 6 percent to 25 percent of the weapon’s sale value depending on how much of the weapon system the Pentagon procured.

The money recovered is returned to the Treasury as general deficit reduction. If a low-end 5 percent fee was charged on all $12.8 Billion of government-negotiated arms sales in 1994, the U.S. deficit would have decreased by $640 million.

If such fees were applied to industry-direct sales perhaps another $500 million to $600 million of red ink would be eliminated.

Instead, at Industry’s behest, successive administrations have exploited several loopholes reducing the Treasury’s take to only $150 million to $170 million annually. If enacted into law the procurement reform but would eliminate even this.

As it stands the recoupment law allows the Pentagon to waive the fee on foreign military sales if the export would promote standardization of forces with NATO or major non-NATO allies such as Japan. Under this provision the Defense Department waived $272 million of recoupment fees in 1994.

In addition such fees are not required by law on sales of smaller weapon systems developed with public funding nor on direct commercial sales negotiated by industry and licensed by the State Department.

Recoupment fees were levied on these sales until 1992. Unlike the requirement on major Pentagon-negotiated sales this policy was embodied only in regulations, which President George Bush’s administration was able to repeal without legislation.

Since then, the administration and industry have argued that the fee on Pentagon-negotiation sales should be abolished in order to "level the playing field" with the State Department’s direct commercial sales program.

Because they do not have to include recoupment costs, industry-direct sales are cheaper and are drawing more customers.

Rather than repeal that recoupment law, Congress should amend it to mandate recoupment fees on all exports of military equipment developed with taxpayer funds, including direct commercial sales and sales to NATO and major non-NATO allies.

The citizens of the country did not finance the development of these weapons for manufacturers’ export profits.


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