Fiscal Year 1999 655 Report:
 Analysis of the State Department's Report on Direct Commercial Sales Licenses


The State Department recently[1] released its portion of the annual report to Congress on arms exports for FY99, as required by Section 655 of the Foreign Assistance Act (commonly known as the 655 Report). The report covers licenses approved for arms exports under the State Department’s Direct Commercial Sales (DCS) program. The Pentagon’s Foreign Military Sales (FMS) report on weapons deliveries was sent to Congress in a separate document this summer. 

The total amount of defense articles licensed for export by the State Department in FY99 was $18.5 billion, and the total licenses for manufacturing and technical assistance agreements was 28.4 billion, for a total of $46.9 billion. This is in addition to the Pentagon’s previously released figure of $16.4 billion in weapons deliveries under their Foreign Military Sales program. It is important to note that the State Department only report on licenses for exports, rather than actual contracts or weapons deliveries (unlike the Pentagon, which reports on deliveries). These licenses are good for four years, meaning that the exact weapons systems or defense services listed in this report were not necessarily exported in FY99. Licenses allow companies to proceed with a sale, but many deals fall through or are signed for a lower amount. There is also an element of double counting between the defense articles and the manufacturing licensing agreements, as many licensing agreements include spare parts or other articles for which the exporting company needs to seek an additional, overlapping license. All in all, the actual amount of arms and services delivered is less than half of what is licensed in a given year. It is not possible to know the exact quantity, however. There will be more light shed on actual exports in the future, as the Security Assistance Act of 2000 passed in the fall of 2000 required that future 655 reports include actual deliveries of articles and services approved under the DCS program. Yet even if the actual amount delivered is only a quarter to a half of $46.9 billion, this still represents an enormous quantity of defense articles and services considering the Congressional Research Service reported a worldwide total of $34 billion worth of weapons deliveries in 1999. (The CRS uses a conservative estimate of DCS deliveries based on an incomplete tally of shippers' declarations passed to State somewhat unreliably from the Customs Service.)

This year’s 655 report shows an alarming increase of $20 billion from past years' total licenses, which had been averaging about $25 billion a year. Some of the increase is due to a rising proportion of licenses for manufacturing or technical assistance agreements, which are generally worth much more than the spare parts and small arms that compose most of the licenses for defense articles. The State Department describes the boom in defense services as a reflection of the “growing complexity of commercial defense trade” where international joint ventures and overseas production are an increasingly common part of arms sales agreements. But by approving such licenses to over 70 countries – from Algeria to Rwanda and Russia – the State Department is actively endorsing these types of arrangements and is therefore helping to proliferate weapons production capacity. Instead of exporting weapons systems made in the U.S., U.S. companies are increasingly exporting to foreign firms the technology and authorization needed to produce U.S. weapons - from ammunition to missiles - on their own.  

The State Department has recognized that, at the very least, licensed production for high-tech weapons systems might require closer Congressional scrutiny under Section 38 of the Arms Export Control Act. State therefore ordered an audit of companies’ manufacturing agreements to make sure the amounts in the final contract did not fall over the threshold for Congressional notification. To their surprise, State’s audit turned up billions of dollars worth of underreported agreements. The 655 report states, “The results of such audits frequently disclose higher values than previously reported or initially projected by U.S. defense firms owing to a variety of factors, including extensions in the validity of agreements well beyond the original time frame envisaged.” Just one company (presumably Boeing based on the equipment referred to) undercounted by $10.3 billion! Nowhere in the report is a sense of concern that these companies were seriously violating their State Department licenses, which are for a limited amount of time and money. The Office Defense Trade Controls at State told the ASMP that the companies will probably be fined for their violations of the law. But this type of slap on the wrist is not likely to deter companies from misbehaving in the future and is certainly not equal to the crime of underreporting billions of dollars of defense contracts. 

The 655 report shows a disturbingly large range of recipient states authorized to receive everything from ammunition raw materials to AMRAAM spare parts. The State Department claims that authorizations “continue to center on a relatively small number of friends and allies of the United States,” mostly to Japan and the United Kingdom. Yet the report shows 129 countries received licenses for defense articles, and a subset of 71 states received licenses for manufacturing or technical assistance agreements. When combined with the number of states identified as receiving FMS shipments in FY99, the number goes up to 152 (out of a total of 191 independent countries in the world, or 80% of the market covered!). In fact, the report – which provides only general information on weapons transferred or agreements reached – actually raises more questions than it answers. For instance, in a time when Secretary Albright has been pledging not to transfer arms to regions of conflict, why did State approve a license for $24 million of manufacturing or technical assistance agreements to Rwanda? So that they could produce their own armaments in this extremely troubled part of Africa? And why did State approve over $1 million worth of small arms and spare parts to Zimbabwe, which is involved in the war in the Democratic Republic of Congo and has its own internal crisis brewing. Even Angola and Congo (the report didn’t specify Kinshasa or Brazzaville) received licenses for small amounts of weapons. Algeria, still in the midst of a particularly brutal civil conflict, received licenses for both $288 million worth of defense articles and another $280 million worth of manufacturing or technical assistance agreements. 

The State Department report also shows a disturbingly high rate of licenses for the export of small arms and light weapons, despite the Department’s commitment to reducing illicit trafficking of this type of weaponry. For example, small arms, ammunition, and ammunition manufacturing materials were licensed for export to all but two countries in Latin America and the Caribbean (Cuba and  Suriname), a region where high crime rates, drug trafficking, and political instability would seem to call for particular restraint. It is hard to imagine the foreign policy goal that could lead to blanket approval of small arms in the region, leading one to believe the main rationale is to keep markets open in all of these states. State has also apparently reversed a policy articulated in 1997 not to sell crowd control devices such as small arms to Turkey, which still engages in serious human rights abuses. Over $10 million worth of assault rifles, pistols, small arms cartridges, and ammunition raw materials were licensed for export to Turkey in FY99, according to the report. 

Again, until more information is provided in the 655 report, it will be difficult to make an accurate analysis of the risks involved in the transfers. What’s really needed is information not just on licenses provided, but the amount on the actual contracts negotiated with the U.S. company and the foreign entity (which, by the way, can be either a government or private buyer). We also need to shed light on the enormous amounts of manufacturing and technical assistance agreements that are now lumped together in one category with no additional information provided. Listing details of these agreements might also help prevent double-counting between defense articles approved as part of those agreements and listed for a second time under defense article licenses. In short, the U.S. government certainly leads the world in openness on arms sales, but it still has a ways to go before it can be called completely transparent. 

[1] The 655 Report for FY99 was actually due last February, but was only transmitted to Congress in October. The Arms Sales Monitoring Project at FAS obtained a copy in early December, but we noticed a major error in the total figures for defense articles: there was a $7 billion difference between the total figure cited in the introduction to the report and the grand total in the report itself. The smaller number turned out to be correct, and State had to reissue the report with the correct numbers. The overcounting seemed to be due to a failure to separate out all the manufacturing and technical assistance agreements items from Part I, which was supposed to be limited to defense articles. In addition to taking out any actual manufacturing or technical agreements that were mistakenly included, the State Department also took out or greatly reduced various spare parts, components, or support equipment, presumably that were part of manufacturing licensing agreements.


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