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No. 35 (6 August 1997)

This issue: Lobbying report
| Gutting Export Review and Licensing | Protecting the Use of Offsets |
| Opening New Markets | Export Financing | Euthanize the Code of Conduct |
| Latin America Market | NATO Expansion | Deals in the Works | Recent Government Documents |

The Arms Exporter's Wish List

The Aerospace Industries Association (AIA)--representing 52 U.S. manufacturers of military and commercial helicopters, aircraft, engines, missiles, and spacecraft--is one of the principal Washington lobby organizations working to promote weapons exports. With the downturn in Pentagon procurement, foreign sales are increasingly important and now account for about 30 percent of the industry's business. Thus, the AIA-- ably led by its President Don Fuqua, a former 12-term Congressman from Florida, and Joel Johnson, Vice President for International (read sales)--has been at the forefront of efforts to eliminate export controls, increase subsidies for arms marketing and export financing, keep information on sales from public scrutiny, and open new markets.

These activities have paid off, as the aerospace industry enjoyed record after-tax profits last year of $7.6 billion. The AIA cites "mature programs"--those weapons that U.S. forces are done procuring, and are now produced solely for export--in fighter jets, transport planes and helicopters as a principal contributor to the high returns. In addition, consolidation and layoffs in the industry have padded the profit margin.

Culled from recent issues of the monthly AIA Update newsletter, the AIA homepage and the military trade press, the industry's current agenda to promote and facilitate weapons exports is outlined here.

Gutting Export Review and Licensing

In May testimony before the House International Relations Committee, Johnson suggested that Congress consolidate all export controls under one permanent law and make the Commerce Department the single administrator. Currently, the State Department reviews and licenses industry-negotiated weapons sales, while the Commerce Department licenses exports of "dual-use" equipment--items with military as well as non-military utility. The Commerce Department is much less restrictive than is the State Department, and already, at the behest of industry, many items have been moved from the jurisdiction of the State Department to that of Commerce, in order to expedite exports.

Johnson also urged that "license-free" regions be created where U.S. weapons exporters would not be required to obtain government permission for sales to countries that agree to enforce "similar export controls." To further reduce government oversight, he encouraged the establishment of "program licenses," to allow shipment of spare parts throughout the life of a given weapon system (which is often two or more decades) without going through a licensing procedure. Finally, he recommended the creation of a "self-policing" mechanism, which would give weapons contractors the ability to authorize exports "within prescribed government policy guidelines," without being subject to government review and approval.

If implemented, these proposals would weaken an already anemic export review process. A safer alternative--one that would streamline the process, eliminate redundancy, and enhance oversight--would be to transfer the State Department role in licensing industry-direct sales to the Defense Department, which currently runs government-negotiated arms sales and exercises more oversight than does the State Department (see ASM No. 27 p. 2).

Protecting the Use of 'Offsets'

In its June 1997 newsletter, the AIA says it will seek to ensure that companies continue to have the flexibility "to cooperate with and purchase from our important defense trading partners." In particular, AIA will work to change specific legislation and regulations like "technology transfer controls, 'buy America' provisions, and offset restrictions." Offsets are the side deals that increasingly accompany weapons sales in today's glutted market. They steer some economic benefit (usually arms production jobs or technology, or marketing assistance and access for some of the buying country's goods) back to the arms purchasing country, as an inducement to buy the weapons (see ASM No. 31 p. 7). The industry is very sensitive to efforts to limit the use of offsets or to make information on these side deals public, claiming that the information is "confidential business information."

According to the AIA, "Customers for U.S. defense products are governments that like to spend taxpayer revenues in ways seen to provide jobs and other economic benefits to [their] taxpayers." It is imperative, AIA argues, that offsets--including production of weapons abroad--are provided, despite deleterious effects on U.S. industries and workers. AIA admits this adverse affect, saying it will "work with the U.S. government to identify subsections of [American] industry that are negatively affected by offsets or imports and find ways to improve their competitiveness." But AIA will resist "unilateral restraints on offsets that could affect U.S. industry's ability to continue a strong position in the global defense market."

Opening New Markets

One of the AIA's "Top Ten" issues for 1997 is "normalization" of U.S.-China trade relations. While the lobby group is savvy enough not to highlight military and dual-use aerospace sales in its writings, in fact this dimension of trade is the only part that is not currently "normal." U.S. arms exports continue to be barred as a result of the Chinese government's attack on pro-democracy demonstrators at Tiananmen Square in June 1991. AIA argues that it will miss out on this vast market, unless the U.S. develops "free and open trade with China."

AIA President Fuqua has also editorialized about the need to lift restrictions on advanced combat plane sales to Latin America (for more on this, see p. 3).

Export Financing

Increased government financing for weapons sales has long been a primary objective of arms exporters. To supplement the $4 billion of grant and loan Foreign Military Financing provided to nations annually for the purchase of American-made weaponry, the manufacturers worked to establish the new Defense Export Loan Guarantee (DELG) program. Through the DELG, which opened for business last November, 38 countries are authorized to receive U.S. government guarantees for up to $15 billion in commercial loans for weapons purchases (see ASM No. 33 p. 2).

In establishing this program, Congress specified that the importing government or the weapons exporter pay a risk insurance fee to protect U.S. taxpayers against potential default. The amount of risk insurance required is based on a country's credit rating, as determined by the Office of Management and Budget (OMB), with riskier countries paying higher fees. For example, according to the State Department, the OMB's credit rating for the Czech Republic, Hungary, and Turkey would result in exposure fees respectively of 8.9 percent, 19.6 percent, and 27.5 percent on a five-year repayment schedule. These high fees have prevented many governments from using the program.

The AIA is now working to "improve" the DELG program to make it more attractive to customers by allowing the risk insurance to be financed as part of the loan, by having Congress appropriate money to cover the exposure fee, or by lowering the amount of risk insurance that users must pay to obtain guarantees.

The AIA is also working to expand the list of countries eligible to obtain DELG credits, presumably seeking to extend the program to Latin American governments.

Finally, the AIA supports renewal of the Export-Import Bank's authorization to provide financing for foreign sales of military equipment to be used primarily for civilian purposes (see ASM No. 26 p. 5). Since 1995, when the Ex-Im Bank was re-authorized to underwrite weapons sales, it has made $226.1 million in loans and loan guarantees to support ten dual-use exports to Indonesia, Brazil, Venezuela and Romania.

"Euthanize" the Code of Conduct

The AIA lobbies against the Code of Conduct on Arms Transfers, which the House of Representatives passed in June. The Code establishes human rights, democracy and non-aggression criteria for governments to be eligible to import American arms. In its May 1997 newsletter, the AIA announced its opposition to "unilateral proposals--such as the Code of Conduct--that could complicate U.S. security and economic relations with friendly countries without accomplishing any useful purpose." The AIA's Johnson said he would "euthanize" the Code of Conduct when a House-Senate conference committee considers the measure this summer.

He added that U.S. weapons contractors "strongly support the effort to get a Code of Conduct in the U.N.," an unlikely eventuality unless the U.S. government first accepts such a code.


An arms race provides a fabulous market opportunity

At the direct urging of the arms industry, on August 1 the Clinton Administration lifted a nearly two-decade-old ban on exports of advanced weaponry to Latin American governments. The restraint policy was implemented in the late 1970s by the Carter Administration, due to prevalent human rights abuses and military dictatorships in the region. In recent years, democracy has made gains, and proponents of lifting the ban say there is no longer any valid reason to sanction these governments. Opponents say there is no security rationale for an expensive round of military modernization, and that aggressive arms pushing in the region will drain scarce resources from development needs.

In announcing the policy reversal, the White House press secretary stated that, "It is in America's national security interest to promote stability and security among our neighbors in the hemisphere by engaging with them as equal partners as they modernize and restructure their defense establishments." (Click here for the text of 1 August 1997 White House statement on Latin America arms transfer policy.)

The decision—imminent for a year—came as little surprise, in light of a March 31 announcement by the White House that it was allowing Lockheed Martin and McDonnell Douglas to compete against European firms in a contest to sell 20 advanced fighter jets to Chile. The administration's review of Latin arms export policy has centered around this $500 million deal, but the stakes are potentially much higher, since several governments in the region have said that if Chile buys top-of-the-line jets, they will have to respond in kind. American weapons manufacturers estimate that South America holds $7 billion in future combat aircraft orders.

Chile's request for fighter aircraft bids has already prompted Brazil to begin gathering information on fighter jets. And the Argentine government, which has long asked Washington not to sell advanced arms to Chile, saying it would have to match the buy and could only afford to do so by transferring money from social programs to the military, is now reviewing its options.

Since the restraint policy was implemented, American arms manufacturers claim they have lost $4 billion in sales to European competitors, hurting them economically and proving the policy's failure. Latin American military spending has been restrained throughout this period, however, and the region has the lowest per capita military expenditure in the world. Moreover, supporters of the ban claim, credibly, that the U.S. policy contributed to democratization in Latin America. Increased emphasis on arms procurement now could undermine these gains.

According to the Congressional Research Service, even with the restrictive policy on high tech weapons sales in place, the United States controlled the largest share of the Latin arms market. During 1992-95, Washington exported $860 million of arms to the region, nearly 30 percent of the total. The four major Western European exporters combined accounted for only 25 percent. (The figure for the U.S. actually undercounts American market share, since it only includes government-to-government sales, excluding industry-direct sales and free "excess defense article" transfers.)

But while U.S. arms sales in the global market have increased 25 percent in recent years, the industry grouses that sales to Latin America have only increased by 14 percent. William Schneider, an arms industrialist and chairman of the State Department's Defense Trade Advisory Group, said recently, "For some time, I've shared the view that the Latin American market was underserved and neglected by U.S. industry." At a DTAG meeting in 1994, Schneider created a "Latin America Working Group" to reverse the restrictive policy. With the ban on advanced weapons to the region repealed, industry expects sales of first-tier fighter/bombers will push U.S. market share up to 70 percent.

Lockheed Martin, which views Latin America as a "growing market with unlimited potential," has led the industry's efforts for over six years to convince the U.S. government to renounce the restraint policy. Of course, Lockheed is counting on payback. According to Ron Covais, Lockheed's director for international strategic planning and business development, "Latin Americans know the Corporation is working to change the policy. When that happens, they will remember us as friends and as a business partner that was there at a most difficult time. That will be key for us...in capturing a major market share in the entire region."

The Aerospace Industries Association has also had its sights on the Latin American market. President Don Fuqua suggested in January that the Clinton Administration approach Latin America as it has Central Europe (see p. 4) and Southeast Asia, acting as a partner in military modernization in order to accomplish U.S. security and economic objectives.

The U.S., however, has no strategic security objectives in Latin America, save for the war on drugs, which is unaffected by the current policy review; counter-narcotics-related transfers proceed apace. In an effort to accommodate industry's marketing plans, the U.S. government is reportedly now considering naming Argentina as a "major non-NATO ally" to calm its security concerns if/when the sale to Chile goes forward. The U.S. has conferred this status, which brings with it certain military benefits, upon only a handful of states (Israel, Egypt, Jordan, Australia, Japan).

Jobs, of course, are the U.S. industry's trump card in lobbying for the policy reversal. But only Chile, with its military independently financed by the country's copper mines, has the resources to buy new off-the-shelf fighter aircraft from the U.S. The other principal potential customers--Brazil and Argentina--are likely to demand local production of weapons and/or upgrades of older aircraft, neither of which would have much positive impact on U.S. jobs. Lockheed Martin has already set up a regional aerospace center in Cordoba, Argentina to repair and refurbish aircraft in South America.


Means market expansion...if U.S. taxpayers pick up the tab

Meeting in Madrid in early July, the 16 members of the North Atlantic Treaty Organization (NATO) invited the Czech Republic, Hungary and Poland to join the alliance, created nearly 50 years ago to contain these very countries and the rest of the Soviet military bloc. This unlikely eventuality was spurred by vigorous and coordinated lobbying in America by East European ethnic communities and U.S. arms corporations.

Bruce Jackson, a former Pentagon official who served as co-chairman of the Dole for President national finance committee and sat on the 1996 Republican Party platform committee, epitomizes this collaboration. Rapid expansion of NATO was one of Candidate Dole's principal foreign policy tenets, which in turn propelled Clinton Administration support for the policy. At the same time, Jackson co-founded the "U.S. Committee to Expand NATO," which helped East European ethnic groups craft their messages in support of expanding the alliance. His full-time job, however, is director of strategic planning for Lockheed Martin.

The arms industry stands to gain a great deal from NATO expansion—a new market worth up to $30 billion. "For 50 years, this has been the only region of the world that has been denied Western military products, and so you are starting at ground zero," observed the AIA's Joel Johnson.

Commonality of equipment—or interoperability—is a hallmark of coalition war-fighting and a prerequisite for all NATO militaries. Thus, U.S. industry is competing fiercely amongst itself and with its European brethren to sell the future members everything from NATO-standard radios, radars and air traffic control equipment to attack helicopters and fighter jets. The market for the latter has commanded the most attention, with the U.S. arms industry citing $10 billion in potential fighter sales.

Total cost estimates for NATO expansion range from $27 to $125 billion over the next 10-15 years, depending in large part on how many new members are ultimately added. The Clinton Administration has promised that the U.S. share of NATO enlargement will "only" cost American taxpayers $150-$200 million annually for the next decade. But this figure is optimistic, representing only 10 percent of the likely costs, while the United States currently is required to pay 25 percent of NATO's bills. And, following Madrid, both the British and French governments quickly announced that they would not increase their military spending to cover the cost of growing the alliance.

The more new members, the greater the cost—and the larger the arms market. With this in mind, the industry has worked to make expansion of NATO as inclusive as possible. Twelve countries expressed interest in joining the alliance, but as the Madrid summit approached the Czech Republic, Hungary, Poland, Romania, and Slovenia were the frontrunners.

Bell Textron, which recently signed a contract to produce 96 AH-1W "Super Cobra" attack helicopters in Romania, lobbied hard for Romania's inclusion in the first round of NATO expansion, but to no avail. According to Bell lobbyist Dick Smith, Bell was "doing everything we can to tell their story to our friends here." Lockheed Martin's recently retired chief executive, Norm Augustine, also pushed for Romania's inclusion, soon after he sealed an $82 million radar contract there. As Romania's ambassador to Washington, Mircea Geoana explained, "The most interested corporations [in getting Romania into NATO] are the defense corporations, because they have a direct interest in the issue."

The pro-expansion lobby in Washington is now gearing up for Senate ratification of the three new members. It is also working to ensure a further round of expansion in 1999, possibly to include the Baltic states, Romania, and Slovenia.

Acknowledging the industry's stake and role in policymaking toward the region, Paul Kaminski, the Under Secretary of Defense for Acquisition, noted at a meeting with arms exporters in May 1996 that, "Financial constraints prevent PFP ["Partnership for Peace"—a forerunner to NATO expansion] countries from acquiring the necessary equipment to modernize their armed forces. Since U.S. defense companies welcome additional sales opportunities for their products, the United States has strong economic incentives to strengthen [military] ties with the PFP."

Sales of American arms to these cash-strapped countries will be possible only with cash transfers from U.S. citizens. Beginning in 1994, the U.S. government has already initiated several aid programs to finance the rearming and training of Central and East European militaries. According to a June report by the General Accounting Office, during fiscal years 1995-97, the executive branch gave $309 million to countries participating in the PFP (see table for details). Nearly half of this assistance has been directed to the Czech Republic, Hungary, Poland, Romania, Slovakia, and Slovenia, the states most prominently targeted by U.S. arms manufacturers.

In addition to grant aid programs, the Pentagon and arms manufacturers are dangling low-cost leases and free transfers of used, surplus equipment, in order to "hook" buyers on American equipment. They are also encouraging the use of the Defense Export Loan Guarantee program to finance new weapons purchases. The "emergent democracies" in Eastern Europe were specifically authorized to receive billions of dollars in U.S.-government backed loan guarantees through the program. Thus far, the first three NATO candidates, as well as Slovenia, Lithuania, and Romania have expressed interest. Romania has also obtained financing from the Export-Import Bank to fund the purchase of Lockheed Martin radar systems.

Central and Eastern European countries are also aggressively negotiating industrial cooperation deals and other offsets on future weapons contracts. Late last year, Lockheed Martin and McDonnell Douglas set up offices in each nation to negotiate offsets related to potential sales of F-16 and F/A-18 fighter jets.

Deals in the Works

During April-July, the Clinton Administration notified Congress of over $3.7 billion of proposed arms sales or giveaways to developing countries. "FMS" refers to Pentagon-negotiated Foreign Military Sales, "DCS" to industry-negotiated Direct Commercial Sales, and "EDA" to reduced-price or free transfers of "excess defense articles." The Arms Export Control Act requires only that the administration notify Congress of FMS and DCS valued at $14 million or more. Sales below that threshold are not recorded here. Congress has 30 days to stop proposed FMS agreements and DCS licenses from going forward (15 days for NATO members and major non-NATO allies). To block a sale, a two-thirds majority in both houses of Congress must pass a resolution of disapproval. None of the following sales was challenged.

Click Here to see that table.

Recent Government Documents

Coding Munitions List Items Audit Report no. 97-130 of the Dept. of Defense Inspector General, 16 April 1997.

The DISAM Journal of International Security Assistance Management, Vol. 20 (Spring 1997), Washington: U.S. Government Printing Office.

Disposal of Munitions List Items in the Possession of Defense Contractors, Audit Report no. 97-134 of the Dept. of Defense Inspector General, 22 April 1997.

Drug Control: U.S. Heroin Control Efforts in Southwest Asia and the Former Soviet Union, U.S. General Accounting Office (NSIAD-97-148), 9 May 1997.

Fiscal Year Series as of September 30, 1996, Defense Security Assistance Agency, Department of Defense, 1997.

Foreign Military Sales, Foreign Military Construction Sales and Military Assistance Facts as of September 30, 1996, Defense Security Assistance Agency, Department of Defense, 1997.

Foreign Operations, Export Financing, and Related Program Appropriations for 1998 (hearings before a Subcmte. of the House Appropriations Cmte.) Washington: U.S. Government Printing Office, 1997. [Contains FY 1998 Congressional Presentation for Foreign Operations and testimony on security assistance.]

Hong Kong's Reversion To China: Effective Monitoring Critical to Assess U.S. Nonproliferation Risks, U.S. General Accounting Office (NSIAD-97-149), 22 May 1997.

Intelligence Analysis of the Long Range Missile Threat to the United States, (hearing before the Senate Select Cmte. on Intelligence on 4 December 1996), Washington: U.S. Government Printing Office, 1997.

NATO Enlargement: U.S. and International Efforts to Assist Potential New Members, U.S. General Accounting Office (NSIAD-97-164), June 1997.

Overseas Presence: More Data and Analysis Needed to Determine Whether Cost-Effective Alternatives Exist, U.S. General Accounting Office (NSIAD-97-133), June 1997.

Proliferation: Threats and Missile Defense Responses (hearing before the Military Procurement Subcmte. of the House National Security Cmte.) Washington: U.S. Government Printing Office, 1997.

Report on Human Rights and the Process of NATO Enlargement, Washington: Commission on Security and Cooperation in Europe, June 1997.

A Review of the President's Certification Program for Narcotics-Producing and Transit Countries in Latin America (hearing before the House International Relations Subcmte. on the Western Hemisphere on 7 March 1996), Washington: U.S. Government Printing Office, 1996.

U.S. Export-Import Bank: Process in Place to Ensure Compliance with Dual-Use Export Requirements, U.S. General Accounting Office (NSIAD-97-211), July 1997.

U.S. Interests in Southeast Asia (hearings before the Subcommittees on International Economic Policy and Trade and Asia and the Pacific of the House Committee on International Relations, May 30 and June 19, 1996), Washington: U.S. Government Printing Office, 1997.

U.S. Military Equipment and Human Rights Violations in Turkey, Department of State, July 1997.

Worldwide Maritime Challenges 1997, Office of Naval Intelligence, Department of Defense, March 1997.