FOREIGN MILITARY SALES AND

U.S. WEAPONS COSTS

Staff Working Paper

May 5, 1976

CONGRESS OF THE UNITED STATES

Congressional Budget Office

Washington, D.C.

CBO-1106
PREFACE

Although the U.S. foreign military sales program has been

justified chiefly on security and foreign policy grounds, recent

debate has emphasized its economic advantages in reducing U.S.

weapons costs and requirements. The foreign military sales program was discussed in the international affairs section of the

CBO report, Budget Options for Fiscal Year 1977. This paper,

which was prepared at the request of the Senate and House Budget

Committees, examines in greater detail the program and its implications for savings in U.S. weapons costs.

This report was prepared by Sheila Kean Fifer of the National

Security and International Affairs Division of the Congressional

Budget Office. She wishes to acknowledge the research and analytical

assistance provided by Robert E, Schafer and James R. Capra of CBO's

Budget Analysis Division and the helpful suggestions of Robert B,

Mantel of the Senate Foreign Relations Committee staff.

A companion CBO staff working paper, Budgetary Cost Savings to

DoD Resulting from Foreign Military Sales, examines and projects the

cost savings from the foreign military sales program on the basis of

data analysis of 35 major weapons systems.

Alice M. Rivlin

(m)
CONTENT S

Summary vii

Background: Process and Participants 1

Savings in DOD Weapons Costs 5

Sources of Savings 6

Profile of Savings by Weapons Systems 10

International Aspects of FMS Savings 13

TABLES

Table 1: Foreign Sales Categories 11

Table 2: Major Recipients of U.S. Foreign Military Sales 14

(v)
SUMMARY

Until recently, evaluation of the foreign military sales (FMS)

program has depended chiefly on security and foreign policy judgments.

The program's goal has been assumed to be promotion of these policies,

and its success measured by how well they are served. Recent debate has,

however, extended to the economic consequences of foreign sales—particularly

their secondary effects in reducing U.S. weapons costs and requirements.

These savings have been considered as a valuable attribute of the FMS program, as compensation for faults in the program, and as reason for not

restraining the program with additional Congressional regulation.

This study finds that some individual cases do produce substantial

savings against a given weapon's total program costs. These cases are,

however, exceptional. Large savings do not seem to be generally characteristic of FMS. Similarly, it is difficult to identify consistent savings

resulting from reduced requirements on U.S. military resources as a result

of FMS1 strengthening recipient states. Certain sales—such as those to

NATO allies—may reduce pressures on U.S. resources. The majority of

sales, however, go to the Middle East, where more important policy concerns, such as the distribution of U.S. weapons technology, complicate

and overshadow military costs evaluations.

Other findings of this study are:

• For a few, selected weapons systems, the savings from

foreign sales are substantial, ranging up to 15 percent

of a weapon's procurement costs in a given fiscal year

and 8 percent of its total research and development

(R&D) costs. R&D cost recoveries appear to be the single

largest source of FMS savingsJ

• These savings are primarily from sales of recently

developed "high-technology" systems—particularly new

fighter aircraft and missiles. Savings are, then,

1. The savings discussed in this paper are approximate illustrations,

and are based largely on data provided by the Office of the Secretary of

Defense (OSD) and the services. A more detailed discussion of the relationship between procurement costs and FMS savings can be found in

Budgetary Cost Savings to DoD Resulting from Foreign Military Sales, a

CBO staff working paper.

The examples given here, 15 percent of procurement costs and 8 percent

of R&D costs, are for the TOW missile launcher and F-14 fighter, respectively. They are the single largest examples of savings of their kinds

among FMS data CBO has collected thus far.

(VII)
directly tied to the transfer, at cost, of recent and

sophisticated U.S. weapons technology.2

• For most sales—ship, ammunition, artillery, military

equipment, and services for which early R&D and other

costs have already been absorbed—there appear to be

little or no cost savings.

• The relationship between restrictions on FMS and increased Department of Defense (DoD) weapons' costs will

depend less on how many total sales dollars are approved

than upon how many sales of newly developed, hightechnology systems are permitted.

• Reduced U.S. weapons requirements--because FMS strengthens

the recipient states—is a potentially far more important

source of savings. It is difficult, however, to define

clear savings, particularly since a majority of recent

sales have gone to three regional powers: Iran, Saudi

Arabia, and Israel.

2. The term "high-technology" is used here to refer to major new weapons

systems which employ sophisticated and specialized technology.

(VIII)
BACKGROUND: PROCESS AND PARTICIPANTS

The processes for approving and delivering foreign military sales

(FMS) have changed little since security assistance programs were first

organized at the close of World War II. Then the intention was that the

existing units in each armed service which procured weapons and equipment

should also be used for foreign arms transfers. Procurement for foreign

governments was managed on a case-by-case basis as a small side account to

U.S. procurement.

FMS is still managed that way. The fragmented and ad hoc pattern

continues even though sales have grown to 15 percent of U.S. procurement,

involve considerably more negotiation than the grants of the earlier

period, and now deal in highly sophisticated weapons systems. Foreign

sales are still largely administered along three separate but roughly

parallel lines in the Army, Navy, and Air Force. It is in the services

that most negotiations with foreign governments and manufacturers are

initially processed.

The Army, Navy, and Air Force each maintain a security assistance

division which oversees weapons sales and grants to foreign governments.

To the extent that there is any working-level center in the fragmented

FMS process, it is these divisions. They are the link between foreign

purchasers and weapon-program managers who negotiate and oversee U.S.

procurement. The services' program managers also provide the costing and

pricing figures used by security assistance in offers to foreign governments and by the services' comptrollers for budgeting and appropriations.

The three services' international logistics divisions also simultaneously

provide transport, servicing, and training to foreign purchasers and to

the Army, Navy, and Air Force.

With the rapid growth in foreign sales, the Office of the Secretary

of Defense (OSD) has come to take a more active role in overseeing the

FMS function. In 1971 the Defense Security Assistance Agency (DSAA) was

formed as the primary agent responsible for administering all Department

of Defense (DoD) security assistance programsJ (The Director of DSAA

reports directly to the Secretary of Defense.) With personnel totaling

approximately 90, DSAA is authorized to direct, supervise, and administer

all security assistance plans and programs. While much of the administration may, out of necessity, be delegated to the services, it is still

the responsibility of DSAA.2 DSAA does, in fact, become involved in the

1. DoD Directive 5105.38 (August 11, 1971; amended May 10, 1973).

2. Geri M. Riegger (White House Fellow), Security Assistance Administration in the Department of Defense, an unpublished manuscript (July,

1975), p. 15.Muc h of the following section is drawn from this manuscript.

(i)
majority of approved sales cases. It reviews any sales requests for Iran

and Saudi Arabia, all requests which involve major weapons systems, all

cases with a value of over $5 million, coproduction proposals, and sales

to restricted countries.

The Director of DSAA, General H. M. Fish, is also Deputy Assistant

Secretary of Defense for International .Security Affairs (ISA). ISA is the

other major OSD organization primarily involved in security assistance

management. ISA is responsible for forming security policy for sales, assistance, and credit programs. As a result of his two positions, General

Fish is charged with both forming and executing security assistance policy.

The Military Assistance Advisory Groups (MAAGs) are stationed in 45

countries to represent DoD and to aid foreign governments in developing

security programs. The MAAGs were originally established to guide and

administer the Grant Aid (or MAP) programs. With the transition from

military aid to military sales, the majority of MAAG effort worldwide has

come to be expended on FMS rather than on MAP. Although the MAAG units

have been reduced in recent years, there is still some debate on whether

their 1,800 personnel may be excessive for their responsibilities.

The MAAGs are often the first point of contact in the three-part FMS

process: pricing and availability, letters of offer, and delivery. A

sales inquiry may come through the MAAG, the State Department, or directly

to the Army, Navy, or Air Force. The services respond with a pricing and

availability statement. This report requires a review of all costs involved in procuring and delivering the specified item; it is also intended

to prevent the diversion to foreign purchasers of materials needed by the

services. After pricing and terms are negotiated (these discussions are

normally handled by the security divisions), a formal letter of offer is

signed. Once the item 'has been procured, responsibility for delivery falls

upon the services' international logistics divisions.

This process varies considerably from case to case, and many more

offices take part in the process than have been indicated in this brief

overview. Almost every major organization in DoD takes at least some

minor role in the sales and assistance function.

In fact, the expanding portion of DoD personnel involved in this

function has led to concern over manpower strains.3 FMS personnel (other

than MAAGs) are allocated under the DoD manpower ceiling set each year

3. DoD does not have ready access to the total number of personnel in OSD

and the services who participate in the FMS function. DoD identifies personnel involved in the FMS program in terms of man-years, and excludes MAAG/

Mission personnel and other personnel whose costs are recovered as part of

the price of a material or service item—personnel who nonetheless remain

under the total DoD ceiling. With these exclusions, the Defense Security

Assistance Agency estimates that 4,800 man-years, both military and civilian,

were devoted to the FMS program in fiscal year 1975.
by Congress. While DoD tries to recover full costs for the personnel effort

in FMS, foreign governments' payments for manpower costs do not translate

into additional manpower. Over the last five years, the ceilings have been

steadily lowered, while at the same time the FMS personnel burden has dramatically increased. Most observers agree that there is a consequent personnel shortage in the FMS area, and many believe that other Pentagon functions also feel an increased burden because of the large numbers of DOD

personnel giving some portion of their time to FMS.4 If FMS is consuming

personnel and administrative skills needed in other activities, this use

of limited Pentagon resources might be considered as part of the costs of

the FMS program.5

4. Riegger, Security Assistance Administration, p. 30.

5. DoD supports legislation which would remove security assistance from

the manpower ceiling. If Congress wished to increase manpower available

to FMS, one alternative would be to allocate a manpower ceiling which includes an approved FMS personnel number.

SAVINGS IN DoD WEAPONS COSTS

Through foreign military sales, the Pentagon provides military

materials and accompanying services to foreign governments. These sales

are estimated to total $8.2 billion for fiscal year 1976.6 Assuming recent patterns continue, approximately $6.15 billion, or 75 percent of

total sales, will pay for military materials, ranging (in order of sales

values) from airplanes and missiles through ships, to vehicles and ammunition. The remaining 25 percent of total sales, or approximately $2 billion, will buy the various services that accompany the weapons. These

include training, servicing, constructing (of ports, minestrips, and

roads), and the administrative processing necessary to complete the transaction.

By law and policy, all weapons and services sold through the Pentagon

are to be provided at cost; DoD should incur no burden or profit in its

role as middleman between foreign governments and U.S. manufacturers.7

The price charged foreign purchasers is the sum of the contract price to

the service for the equipment, plus the costs of any accompanying services,

plus administrative and other miscellaneous costs. Calculating costs is

one of the more difficult and uncertain aspects of FMS management. The

intention is, however, that there should be no net effect upon the DoD

budget as a direct result of the FMS program.

The Department of Defense can, however, garner indirect savings from

sharing U.S. development and production costs with foreign purchasers.

Foreign purchasers can be charged, as part of the equipment price, a proportion of the research and development (R&D) costs which the Pentagon

would normally have to pay in full. Foreign purchasers can also lower

unit costs to the service by increasing the production volume. Such

savings mean that the FMS program's ultimate impact on the DoD budget

should be a reduction of weapons program costs.

6. This figure represents the sales contracted during fiscal year 1976,

not the sales delivered. As of February, 1976, $4.2 billion had been

contracted. The fiscal year 1977 projection of $8.9 billion has also

been reduced to $7.4 billion.

7. FMS terms are subject to negotiation. Reductions in weapons prices

and surcharges can be granted when such concessions are judged to be in

the national interest. See DoD Military Assistance and Sales Manual--

Part III, Chapter B, and DoD Instruction 2140.1: Pricing of Sales of

Defense Articles and Defense Services to Foreign Countries and International Organizations. DoD receives authority to administer these aspects

of FMS under Executive Order 10973 (Executive Orders and Delegations of

Authority Relative to Foreign Assistance).

(5)
U.S. procurement savings are claimed as a major economic benefit

of the program. Testimony of Pentagon officials on the FMS program repeatedly lists lower U.S. weapons costs as a valuable by-product of the

program. General Fish, Director of the Defense Security Assistance Agency,

has cited procurement cost savings as an aspect of FMS which "offsets the

risk of temporary reductions in selected weapons stockpiles."8 industry

spokesmen have also used this aspect of FMS to argue against restraints on

sales; they have held that proposed FMS restrictions would cut sales and

result in significantly higher weapons costs for DoD. This relationship

between sales and costs would seem, however, to apply in significant dimensions to only a small minority of the weapons sold under FMS. Given the

composition of the fiscal year 1976 $8.2 billion sales program, total

savings have been estimated to range from $200 million to no more than

$900 million.9

Sources of Savings

The two primary sources of savings from foreign military sales are

recovery of research and development costs and lowered per unit production

costs.'" Both types of savings seem to be derived primarily, though not

exclusively, from recently developed, sophisticated weaponry.

8. Department of Defense Appropriations for Fiscal Year 1976 (H.R. 9861),

Hearings before the U.S. Senate Appropriations Committee, 94th Congress,

1st Session (1975), Part 5, p. 211.

9. This estimate was derived from sales and production data provided to

the CBO Budget Analysis Division by the services and OSD. See Budgetary

Cost Savings to DoD Resulting from Foreign Military Sales, a CBO staff

working paper.

10. Maintenance of a production base is a third potential source of savings

which is not treated here. It is, unfortunately, quite difficult to identify since it relies upon various assumptions about the timing of U.S. procurement requirements. These savings arise when a break occurs in orders

from the U.S. services for specific weapons and equipment. Although these

items will be required in the future, U.S. stocks are temporarily full. Under such conditions, it may be necessary to close production facilities and

to later reopen them when U.S. orders are needed again. Both the closing

and reopening of the production base involve expenses which add to U.S. procurement costs. If foreign orders for these items can be interspersed with

U.S. orders, production is maintained and the closing and opening costs are

saved. Unlike R&D recovery and per-unit costs, these savings can apply to

any system. They are also less likely to apply to the major cost items, such

as planes and missiles, which have a definite and continuous production program. Maintenance of a production base would seem to be the most speculative source of savings associated with the FMS program. Accordingly, it is

not included in the following discussion of the overall savings derived

from FMS.
Recovered Research and Development Costs

Recoveries of research and development costs are the most direct and

the largest source of savings. These are also the most easily identified:

Savings are equivalent to the amount of an R&D surcharge added to the purchase price of a weapon. The surcharge represents R&D expenses which

otherwise would have been borne by the United States alone. Once paid by

the foreign government, these monies pass through the FMS trust fund receipts and are repaid to the Army, Navy, or Air Force as credit against

the R&D appropriations requested for the following year. Thus, each of the

service's R&D appropriations should be reduced by the amount of R&D receipts

coming into the trust fundJl

R&D savings vary according to a weapon's development costs and the

length of time the system has been in production. The largest recoveries

come from sales of weapons systems which have been in production for less

than five years. 12 Under official DoD procedures, R&D charges for these

systems can be prorated.13 The estimated ratio of foreign sales to the

total production is the proportion of total R&D expenses that can be distributed to foreign sales. R&D expenses are distributed to each foreign

purchase on a per unit basis. If the estimated production or sales numbers

change, the distribution is revised. For systems which have been in production for longer than five years, DoD regulations require that a flat percentage charge, up to 4 percent, be added to the purchase price.14 These

guidelines are not rigid; purchasers can negotiate a lower than prescribed'

surcharge. Although a complete waiver of R&D costs is normally granted

only to NATO allies, it should be noted that these allies account for nearly

a third of total sales dollars.

Among the kinds of weapons sold under FMS, new aircraft and missile

systems would appear to generate the most consistently high R&D recoveries.

This is in large part because they tend to have comparatively high research

11. In the annual DoD budget, requested R&D appropriations for each of

the services is reduced by the FMS R&D receipts estimated to be received

during that fiscal year. R&D receipts can only be drawn against R&D expenditures.

12. An Iranian fiscal years 1974-75 purchase of 80 F-14s which recovered

$160.6 million in R&D expenses represents a relatively high recovery. See

discussion below.

13. DoD Instructions 2140.1 (June 17, 1975) and 2140.2 (January 23, 1974).

14. Nonrecurring R&D or tooling costs which are peculiar to the foreign

purchase are fully paid by the foreign government. This is, however, not

a savings to the United States. It is a charge for additional expenses

from special production for foreign sales.
and development expenses, and R&D recoveries are potentially a more

significant savings against their overall costs to the United States.

Items such as vehicles, tanks, and ships seldom have equally large R&D

expenses relative to their total program costs.

Given DoD pricing regulations, however, the largest R&D recoveries

occur with the sales of newer aircraft and missiles—those under five years

in production. Given the Pentagon's two methods of apportioning costs--

pro rata or 4 percent of purchase price—the five-year distinction can

make a substantial difference. The sale of 80 F-14s to Iran recovered one

of the larger R&D surcharges reported in recent years. Since the F-14

was in production less than five years, Iran paid a total prorated surcharge of $160.6 million, or slightly more than 9 percent of the contract

price to Iran. Had the F-14 been in production for more than five years,

the recovery would have been substantially less: no more than $70.3 million, or 4 percent of the purchase price. The F-14's estimated total

program cost (not adjusted for inflation) is $8,512.5 million, and Iran

is thus far the only foreign purchaser.15

Lowered Production Unit Costs

The second major source of FMS savings is lowered per unit production

costs. Production savings can amount to as much as the 15 percent of annual procurement costs estimated for the TOW launcher.^ Many of the

articles provided by FMS--such as ammunition, artillery, and ships—however,

generate little or no savings. Like R&D recoveries, production savings

also vary widely among kinds of weapons and circumstances of the individual

sales.

Lowered per unit production costs result from the increased volume

which FMS orders add to U.S. procurement. Under certain production circumstances, increased volume can mean a lower unit cost. The difference

between the actual per unit cost to the United States and the higher cost

which would have been paid in the absence of foreign orders is the estimated

savings. These savings can be the result of economies of scale or of increased production experience: The foreign orders may increase a contract

order to a volume that can be manufactured more efficiently, or they may

provide more production learning and reduce the costs for subsequent U.S.

purchases. In both cases, the marginal benefits will diminish after a given

volume or level of experience has been reached.

15. These costs and savings estimates have not been deflated to a baseyear comparison.

16. The estimate of 15 percent savings refers only to procurement during

fiscal year 1976. It excludes procurement costs in other production years

and R&D costs.
Like R&D recoveries, production savings also vary substantially

according to the size and timing of foreign orders in relation to U.S.

procurement. The greatest savings tend to come from sales which place

large foreign orders early in production. The least savings seem to occur

when foreign orders come near the end of U.S. procurement, are too small

relative to U.S. purchases to affect production costs, involve items which

do not become cheaper with greater volume, or are filled out of U.S. stocks.

Of the various categories of weapons sold to foreign governments,

newer aircraft and missiles seem to most often fulfill the conditions for

high production savings. Their characteristically small production runs

and high unit costs make the added orders from foreign sales a source of

exceptionally high savings; added foreign orders are most likely under

these conditions to increase efficiency, and even a small percentage saving

can be substantial in absolute dollar terms. The Navy predicts, for example, that in fiscal year 1976 Harpoon sales will save $18.6 million, or

12 percent of annual procurement costs.1' While the anticipated savings

from Harpoon sales are higher than most aircraft and missile savings—the

Phoenix, estimated at 5.6 percent, and the TOW missile, at 3 percent, are

more representative—these systems as a group are still substantially above

other major sales items.

Unlike R&D recoveries, however, production cost reductions do not

always represent a clear savings. Additional costs, which should be offset against estimated savings, are sometimes associated with foreign orders.

The intervention of foreign orders can, for example, mean that U.S. procurement is delayed. Delayed U.S. purchases can mean additionally inflated

budgetary costs, although not necessarily higher real costs.18 More important, the presumed delay in procurement means that U.S. forces are temporarily denied a needed resource and required to expend additional maintenance on the systems to be replaced. The F-14 case illustrates another

kind of offsetting cost: production readjustments. The Navy reports that

while the Iranian order initially saved $60 million in production expenses,

additional costs associated with closing the order—while continuing procurement for U.S. orders—totaled $120 mi 11 ion.I9 Although circumstances

17. These figures are a proportion of only the given fiscal year's procurement costs. Weapons development and production in other years are not included. These production cost-savings estimates were provided by OSD and

have not been independently confirmed.

18. Inflation also increases the absolute amount of tax receipts, and

this gain is generally sufficient to finance the additional costs of government purchases. The real cost of the weapon to the government does not

necessarily, therefore, increase.

19. Department of Defense, Selected Acquisition Report, F-14A (December 31,

1975), p. 5F. No itemization is provided in the report for these additional

costs.
10

such as this may be rare, it demonstrates the necessity of including any

additional costs in final assessments of the total production savings generated by FMS.

Profile of Savings by Weapons Systems

The overall savings effect of the FMS program would appear to depend

far less upon the dollar volume of sales than upon the composition of sales.

Hypothetically, a $10 billion program composed primarily of ammunition and

ships—which generate neither substantial R&D nor per-unit production

savings—could produce little savings, while a $5 billion program composed

primarily of missiles and aircraft might produce substantial savings. Furthermore, a program exclusively of missiles and aircraft established in

full production would tend to yield far less savings than a program of newer

items—which could recover R&D expenses and use FMS to move into full production.

In fact, a realistic program must be a mixture falling somewhere between these extremes. The needs of customers require that both high- and

low-savings weapons and accompanying services be made available. The

existing program is such a mixture (see Table 1), with cost savings represented by a minority of sales:20

• Between 25 percent and 30 percent of total sales dollars

represent payments for various services, such as repair,

training, administrative work, overhauling, construction,

and supply operations. These activities, of course, do

not create savings. They may, in fact, generate some indirect, non-monetary costs by straining limited resources

which the services draw upon for support to their own programs.

• Approximately another 11 percent represents the sale of

ships—submarines, destroyers, landing craft, and various

other small craft. While some cost savings may be derived

from procurement of ship components needed for both U.S.

and foreign purchases, overall savings tend to be small

or nonexistent.21

20. This categorization is based on DoD descriptions of the 1975 orders

in Foreign Military Sales and Military Assistance Facts (November, 1975),

pp. 8-11. Estimates of savings characteristics are also based on DoD data.

21. For example, OSD estimates that by simultaneously procuring components

used for both the CGN-41 and the Iranian-purchased DOS destroyer, $4 million

in fiscal year 1976 procurement costs were saved on parts for the Navy's

CGN-41 cruiser. This would mean a 1.14 percent savings in annual CGN-41

procurement costs. The landing and other smaller craft which composed the

majority of ship sales would be expected to yield considerably less savings.
11

TABLE 1

FOREIGN SALES CATEGORIES3

Foreign Military Sales Orders

Fiscal Year 1975

Categories" Percentage of Total Dollars

Aircraft 19%

Ships 11%

Vehicles and Weapons 5%

Ammunition 7%

Missiles 10%

Communications Equipment 2%

Other Equipment ^ 5%

Undefined0 16%

Subtotal, Equipment 75%

Services 25%

Total 100%

a. This table is taken from total sales dollars as given by

these categories in the Foreign Mi 11tary Sales and Mi 1itary

Assistance Facts (November, 1975), Data Management Comptroller,

DSAA, p. 8.

b. For weapons systems, the percentage estimates are inclusive

of spare parts and administrative fees.

c. This is a residual category used by DSAA to denote those

funds which they cannot attribute to any given weapon category.

In fiscal year 1975, undefined sales dollars were considerably

larger than in previous years. If these sales dollars were

distributed in equivalent proportions among the weapons and hardware categories, the percentage categories could rise to the

following: aircraft, 27 percent; missiles, 14 percent; vehicles

and weapons, 7 percent; ships, 15 percent; and communications

equipment, 2 percent.
12

• Roughly another 7 percent of sales dollars is derived

from ammunition, which typically generates little R&D

recovery or production savings.

• Vehicles, tanks, and artillery constitute approximately

5 percent of sales. Vehicles and tanks reportedly can

yield savings; DoD cites high per-unit savings for the

M-60 tank and M-113 personnel carrier--although this

does not seem consistent with their production characteristics. 22 AS a general case, artillery and such

weaponry do not yield significant savings.

• Somewhat less than 2 percent of sales dollars represents

communications equipment which most likely does create

savings.

• A remaining 29 percent of total sales dollars comes

from foreign purchases of aircraft and missiles—weapons

which produce the most R&D recoveries and the most production savings. As discussed above, not all aircraft

and missiles, but only those with a high proportion of

sales early in the production run, generate substantial

savings. Also, some of the production savings may later

be diminished by inflation and other costs associated

with integrating the foreign purchase into U.S. production

programs.

What savings are produced by FMS appear to be largely dependent on

sales of recent, high-technology weapons. Whether or not these weapons

continue to be sold in the same volume is probably the most important

single factor affecting FMS savings. If Congress decides to restrict

these sales, it seems likely that, even with increased sales dollars

elsewhere, total savings will be reduced. Here, however, savings considerations would seem to be outweighed by policy questions. Is it in

the U.S. interest to make this technology available, at cost, to foreign

purchasers? Does the United States gain more by holding exclusive control

of its weapons technology or by sharing it with selected customers? Like

so many aspects of FMS, answers to such questions will vary with the

circumstances of individual sales. Some of the more important of these

circumstances involve the international aspects of FMS.

22. Sufficient data is not presently available to appraise these DoD

savings estimates.
INTERNATIONAL ASPECTS OF FMS SAVINGS

FMS savings in the numbers and kinds of weapons the United States

must procure and maintain are potentially far more important than savings

in the production and R&D costs of weapons. The primary justification

for the FMS program is, of course, its promotion of U.S. foreign policy

and security interests. These sales are intended to strengthen allies and

stabilize regions important to the United States. Substantial savings

would result from sales which strengthened recipient states, decreased

the probability of U.S. active involvement and, subsequently, the Pentagon's military requirements.

From this viewpoint the question of who is receiving these weapons

becomes relevant: What allies are strengthened and what regions stabilized?

For fiscal years 1973-75, NATO members purchased approximately one-third

of foreign sales. More than half of the total sales, however, went to three

Middle East powers: Iran, Saudi Arabia, and Israel (see Table 2). Iran

and Israel have also been leading recipients of the high-technology, costsavings systems described above. The remaining sales dollars were divided

among Latin American, African, Asian, other Middle Eastern countries, and

the Commonwealth states.

Any assessment of the security gains—and consequently reduced

requirements--from sales depends upon the probability that the weapons

will be used consistently with U.S. interests. For the NATO recipients,

the probability is presumed to be quite high. Long-standing commitments

and policies have assumed Western European and U.S. security to be interdependent. Weapons bought by NATO allies may be judged to substitute or

to supplement the United States' own military resources to some degree.

To a somewhat lesser degree, the same benefits might be seen in sales

to allied, less developed countries (LDCs) and Commonwealth states. Of

course, no formula is available to calculate by how much sales may actually

reduce U.S. military requirements. Still, for states with which the United

States has a clear defense commitment, FMS may be considered to reduce indirectly the numbers and, therefore, the costs of weapons the United States

must procure and maintain.

For the majority of U.S. arms sales, however, such judgments are

not so easily made. Any of the three primary Middle Eastern recipients

could, for example, use FMS-acquired weapons, technology, and skills to

pursue goals conflicting with the United States' or with each other's.

Although conditions are less volatile and consequences less severe, the

same potential exists with many other LDC purchasers. Once delivered, the

United States has, at best, very tenuous control over FMS resources.

There can be no assurance that these weapons will not be used against

U.S. interests, thus increasing, rather than reducing, the pressures upon

(13)
14

TABLE 2

MAJOR RECIPIENTS OF U.S. FOREIGN MILITARY SALES£

(Percentage of total sales orders by

purchasing state and fiscal year)

State

Iran

Saudi

Arabiab

Israel

1973

48%

14%

4%

1974

36%

23%

23%

1975

27%

14%

9%

a. Given the average 2-3 year lag between FMS

orders and deliveries, many of these purchases

have not yet been delivered.

b. These figures do not necessarily reflect

comparative levels of U.S. armament, since Saudi

purchases are only approximately 20 percent weaponry. The other 80 percent of Saudi FMS dollars

buy services and military materials. Iranian and

Israeli FMS dollars are invested primarily in

weaponry.
15

military requirements. Under such circumstances, it becomes difficult,

but essential, to estimate whether sales—such as the Iranian purchase of

80 F-14s—do, in fact, reduce U.S. military requirements. At this point,

however, an evaluation of FMS returns to the level of policy judgments:

Do these sales serve U.S. foreign policy? If in a given case the answer

is no, it seems unlikely that cost savings would be sufficient to serve

as a counterbalance.

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