United States General Accounting Office

GAO Report to Congressional Committees

May 1995 MILITARY EXPORTS

A Comparison of

Government Support in

the United States and

Three Major

Competitors

GAO/NSIAD-95-86

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-260186 

May 18, 1995

Congressional Committees

Declining U.S. defense spending has placed defense-related jobs and some

domestic industrial capabilities at risk. U.S. defense companies are using a

variety of strategies to adjust to the decline. One such strategy is to

increase defense export sales. Export proponents point out that such sales

maintain industrial base capabilities and lower the cost of weapons to the

U.S. government. Proponents also argue that more government support for

exports is needed to level the playing field against foreign (mostly

European) competitors. Opponents of providing additional U.S.

government support argue that such support could delay restructuring of

the defense industry and jeopardize longer-term national security by

increasing global weapons proliferation.

Because of the continuing congressional debate on how much support to

provide to defense exporters, we reviewed (1) conditions in the global

defense export market and (2) the tools used by France, Germany, the

United Kingdom, and the United States to enhance the competitiveness of

their defense exports. Specifically, we compared the U.S. position in the

global defense market relative to its major competitors and analyzed the

various factors that can contribute to a sale, including export financing

and other types of government support. We are providing this report to

committees for their use in debating these issues.

Background Governments are heavily involved in most defense export transactions and

they support exports for a variety of reasons. European governments

support defense exports primarily to maintain a desired level of defense

production capability. Their national markets are not large enough to

sustain the full range of weapon systems they believe necessary for their

national security. The United States has traditionally supported defense

exports to meet national security and foreign policy objectives through its

security assistance program. In the United States more recently, however,

the impact of exports on maintaining the industrial base has gained

support as a rationale for providing additional assistance to defense

exporters.

Page 1 GAO/NSIAD-95-86 Military Exports
B-260186 

Defense exports in general have a positive impact on the balance of trade.1

 In 1993 defense exports represented about 0.3 of total exports for

Germany, 1.7 percent for France, 2.2 percent for the United States, and 2.4

for the United Kingdom. The impact of defense exports to total exports,

however, shows a general downward trend since 1990 for three of the four

countries we reviewed. During 1990 defense exports represented

0.4 percent of total exports for Germany, 3.2 percent for France, and

3.4 percent for the United States. In the United Kingdom defense exports

to total exports remained at about 2.4 percent in 1990 and 1993.

Deliveries of global defense exports have declined 64 percent since 1987,

when deliveries were $77 billion.2

 In 1993 deliveries were $28 billion. The

end of the Cold War and changes in the political and economic structure of

the former Soviet Union were considered significant factors contributing

to the overall decrease in arms trade.

Results in Brief The United States has been the world’s leading defense exporter since

1990; by 1993 its market share had increased to 49 percent of the global

market. The increased U.S. market share occurred during a period of

worldwide decreases in total defense exports. The three European

countries we reviewed had in 1993 a combined global market share of

about 32 percent of total defense exports, which also increased since 1990.

In the short term, at least, the United States will likely remain strong in the

world market, based on the level of orders placed but not yet filled.

However, further growth in its market share will be limited by a number of

factors, including U.S. national security and export control policies to

reduce dangerous or destabilizing arms transfers to certain countries and

certain major foreign country buyers’ practices of diversifying weapons

purchases among multiple suppliers.

Government involvement in the defense industry’s sales affects the

position of defense manufacturers in overseas markets. However, various

other factors also influence the outcome of a defense sale. These factors

include technical sophistication and performance of the equipment, the

cost and availability of follow-on support and training, price, financing,

1

Defense exports refer to major weapon systems end items such as tanks, artillery, combat and

transport aircraft, and missiles. Data is based on value of sales.

2

All dollar figures in this report are expressed in 1993 constant dollars. The last year data for all four

countries was available was 1993.

Page 2 GAO/NSIAD-95-86 Military Exports
B-260186 

and offset arrangements.3 It should be noted that government policies and

programs can also affect these other factors. Government support targeted

to increase overseas sales may become more significant as global defense

markets decrease and companies fight to maintain market share. However,

because each sale has its own unique set of circumstances, it is not

possible to quantify or rank the contribution of any one factor across the

board.

The U.S. government has long recognized the positive impact that defense

exports can have on the defense industrial base. In 1990, the Secretary of

State directed overseas missions to support the marketing efforts of U.S.

defense companies as in all other areas of commercial activity.

Governments in France, Germany, the United Kingdom, and the United

States generally provide comparable types of support. These include

(1) government-backed or -provided export financing, (2) advocacy on

behalf of defense companies by high-level government officials, and

(3) organizational entities that promote defense exports.

Although all four countries generally provide comparable types of

assistance to their defense exporters in these areas, the extent and

structure of such assistance varies. In particular, central organizations

support defense exports in France and the United Kingdom, while in the

United States several government agencies share in supporting defense

exports. In addition, all three European countries provide

government-backed guarantees for commercial bank loans; in the United

States, financing is provided primarily through the Foreign Military

Financing (FMF) program in the form of grants and loans and available only

to a small group of countries.4

 In fiscal year 1994, about 79 percent of U.S.

government financing was in the form of grants. With the exception of

annually specified amounts, which Congress mandates for financing

purchases in Israel, FMF generally is available only to finance purchases of

U.S. defense articles and services. Accordingly, providing grant funding for

purchases in the United States generally eliminates the competition from

other countries for those exports.

3

The term “offsets” is used to cover a variety of arrangements by which sellers direct new or additional

purchases to the industry of the buying nation as part of the sale agreement. Direct offsets are directly

related to the product delivered to the customer, such as producing a component of the system in

question. Indirect offsets consist of the purchase of unrelated products or services.

4

Grants represent assistance for which the United States receives no dollar reimbursement. Loans

generally refer to direct loans or repayable foreign military sales credits that are made at either market

or concessional rates.

Page 3 GAO/NSIAD-95-86 Military Exports
B-260186 

In the Short Term, the

United States Is Likely

to Remain Strong in

the World Market, but

Further Growth Will

Be Limited

While the global defense export market has declined since the late 1980s,

the United States has become the world’s leading defense exporter.5

 The

United States had the largest share of global arms deliveries at 32 percent

in 1990 and increased its share to 49 percent in 1993.6

 The overall increase

in the U.S. market share from 1990 to 1993 was due, in part, to decreased

sales by the former Soviet Union. In 1990 the Soviet Union’s arms

deliveries were $17 billion. By 1993 Russia’s defense exports had

decreased 82 percent to less than $3 billion.7

 The dollar value of U.S. arms

deliveries also decreased during this time, declining 22 percent from

$18 billion in 1990 to $14 billion in 1993. Arms deliveries data for calendar

year 1994 is not yet available. However, the Department of Defense (DOD),

which collects data on a fiscal year basis, reported that fiscal year 1994

U.S. arms deliveries were about $10 billion. According to defense analysts,

U.S. arms deliveries are likely to remain at about $10 billion annually for

the rest of the decade.

The market share of France, Germany, and the United Kingdom combined

has increased from 26 percent of total arms deliveries in 1990 to 

32 percent in 1993. Of these three countries, only the United Kingdom

increased its market share, raising it from 9 percent in 1990 to 15 percent

in 1993. The French market share declined from 14 percent to 13 percent

during the same period, while Germany remained constant at about 

4 percent of the arms market in 1990 and 1993. The total value of arms

deliveries for the three European countries combined declined 40 percent,

from $15 billion in 1990 to about $9 billion in 1993. Preliminary 1994

delivery data for France and the United Kingdom suggests a decline from

1993 levels. French and U.K. defense exports for 1994, in terms of

deliveries, are estimated at $2.2 billion and $2.8 billion, respectively.

Delivery data for Germany for 1994 is not yet available. Figures 1 and 2

show the percentage of global arms deliveries for 1990 and 1993 by

supplier country.

5

The market share of all four countries of our review changed following release of more current data

on French defense exports. Previous data on French defense exports, in terms of deliveries, for 1993

was $600 million. Current data on French defense exports released by the U.S. government shows an

increase to $3.7 billion in 1993. As a result of the increase of French defense exports in 1993, the U.S.

market share for 1993 decreased from 55 percent to 49 percent.

6

Data for U.S. defense export deliveries includes exports sold commercially and through the foreign

military sales program.

7

All data for years prior to 1992 represent transactions of the Soviet Union as a whole. Of the former

Soviet Republics, Russia was the principal arms producer and exporter. Therefore, 1992 and 1993 data

reflect only Russian sales.

Page 4 GAO/NSIAD-95-86 Military Exports
B-260186 

Figure 1: 1990 Global Arms Deliveries,

by Supplier

32.0% • United States

• 8.8%

United Kingdom

13.8%•

France

•

3.6%

Germany

30.7%•

Russia

•

3.0%

China

•

5.0%

Europe*

•

3.2%

All Others

*Includes all other European countries, except France, Germany, and the United Kingdom.

Page 5 GAO/NSIAD-95-86 Military Exports
B-260186 

Figure 2: 1993 Global Arms Deliveries,

by Supplier

48.9% • United States

15.2%•

United Kingdom

13.0%•

France

•

3.5%

Germany

•

9.2%

Russia

•

3.5%

China

•

3.5%

Europe*

•

3.2%

All Others

*Includes all other European countries, except France, Germany, and the United Kingdom.

In the short term, at least, it is likely that the United States will remain

strong in the world market; it has $86 billion in defense orders placed from

1990 to 1993, while France, Germany, and the United Kingdom combined

have $27 billion in defense orders from the same period. Although 1994

Page 6 GAO/NSIAD-95-86 Military Exports
B-260186 

data for the three European competitor nations, in terms of defense

orders, is not yet available, U.S. defense orders for fiscal year 1994 were

about $13 billion—a 59-percent decrease from fiscal year 1993 levels,

when orders were $32 billion. Figure 3 shows the total value of defense

orders placed with France, Germany, the United Kingdom, and the United

States from 1990 to 1993.

Figure 3: Defense Orders, 1990-1993

($ billion, 1993 constant)

0

10

20

30

40

50

60

70

80

90

100

United States

France, Germany &

the United Kingdom

United Kingdom

Germany

France

United States

Further growth in the U.S. market share will be limited by several factors,

including U.S. national security and export control policies. For example,

in order to reduce dangerous or destabilizing arms transfers, the United

States does not sell its defense products to certain countries, as part of its

Page 7 GAO/NSIAD-95-86 Military Exports
B-260186 

national security objectives. Those countries include Cuba, Iran, Iraq,

Libya, North Korea, Syria, and several countries of the former Soviet

Union. According to the State Department, U.S. sales to other countries

are reviewed on a case-by-case basis against U.S. conventional arms

transfer policy criteria. Certain major foreign country buyers’ practices of

diversifying weapons purchases among multiple suppliers further limits

U.S. market share. For example, Kuwait announced in 1994 that it planned

to diversify its weapons purchases among all five permanent members of

the United Nations Security Council.

Numerous Factors

Contribute to

Successful Defense

Export Sales

Prior studies conducted by the Office of Management and Budget (OMB),

the Office of Technology Assessment (OTA), and our office have concluded

that there are numerous factors affecting defense export sales and that no

one factor is paramount in every sale.8

 These studies indicate that (1) each

sale has its own unique set of circumstances and (2) the outcome is

dependent on various factors. For example, the OMB study on financing

defense exports concluded that each customer’s decision-making process

on defense acquisitions is sufficiently different that it is impossible to

draw definitive conclusions about the relative importance of any one

factor. While the study was conducted to determine the need for defense

export financing, it found that other factors influence defense sales, such

as price, technical sophistication of the equipment, the cost and

availability of follow-on support, system performance, lead time from

placement of order to delivery, the availability of training, political

influence, and the financial and economic conditions of purchasing

countries.

The OTA study identified co-production and technology transfer as factors

that can influence a defense sale. This study noted countries that desire to

develop their own defense industries are likely to consider access to

technology when buying defense goods.

In our May 1991 testimony before the House Committee on Banking,

Finance and Urban Affairs on a proposal to finance defense export sales,

we pointed out that it is difficult to quantify the effect of financing on

defense sales because of all the other factors involved in the

decision-making process. In addition to the factors cited by OMB and OTA,

8

Financing Defense Exports (Office of Management and Budget, Nov. 1990); Global Arms Trade:

Commerce in Advanced Military Technology and Weapons (Office of Technology Assessment, June

1991); and The U.S. Export-Import Bank: Review of a Proposal to Finance Military Exports

(GAO/T-NSIAD-91-16, May 2, 1991).

Page 8 GAO/NSIAD-95-86 Military Exports
B-260186 

we noted the importance of offsets to a buying country when deciding

between competitors in a defense sale.

U.S. and European

Officials Cite Numerous

Factors Important to

Defense Export Sales

Industry representatives and government officials in the United States and

Europe cited numerous factors that are important to defense export sales,

but had differing views on what factors contributed to winning a specific

defense sale. These officials cited the same factors identified by earlier

government studies, including offsets, political ties, and price and quality

of a product. However, when discussing the reasons behind any particular

sale’s outcome, U.S. government officials and industry representatives

identified different reasons for the outcome of the sale. For example, in

the recent German tank sale to Sweden, U.S. government officials

identified offsets as the deciding factor in the sale, while an industry

representative believed that the historical ties between Sweden and

Germany was the reason why the German tank was chosen. In a sale of

French tanks to the United Arab Emirates, U.S. government officials

considered offsets to be the more important determinant in the sale, while

an industry representative cited historical relationships between the buyer

and the seller as the primary factor.

Moreover, several U.S. and European government officials and industry

representatives stated that potential customers abroad view domestic

procurement of a product as an important endorsement of confidence and

one that helps lower unit costs by increasing the economies of scale

associated with a system. These officials added that it is very difficult for a

company to sell a defense article if its own country’s defense department

or ministry does not use the equipment. For example, according to a U.S.

government official, Northrop’s F-20 was designed specifically for export;

however, Northrop was unable to sell the aircraft overseas, in part,

because the U.S. government did not purchase it for domestic use.

Further, because of the large size of the U.S. domestic defense market,

European businesses feel that they are at a disadvantage with respect to

their U.S. competitors, according to a 1992 survey conducted by the major

French land-defense industry association and the consulting firm Ernst &

Young.

Page 9 GAO/NSIAD-95-86 Military Exports
B-260186 

Governments

Generally Provide the

Same Types of

Assistance to Defense

Exporters

We found that France, Germany, the United Kingdom, and the United

States generally provided the same types of assistance, but the extent and

structure of the assistance varies.

Government-Backed 

or -Provided Export

Financing

All three European countries provide some form of government-backed

export credit guarantees for both non-defense and defense exports as a

means to provide security assistance and promote sales of their defense

products. Data on the value of guarantees for defense exports, however,

was available only in the United Kingdom. During fiscal year 1993/1994,9

the United Kingdom guaranteed $2.9 billion in defense exports. France and

Germany report total export financing and do not differentiate between

defense and non-defense export financing. Therefore, we were unable to

obtain information on the extent of guarantees provided to defense

exports in either country.

In the United States, government financing is provided through the FMF

program. According to DOD officials, FMF is provided as an instrument to

advance U.S. foreign policy and national security interests rather than a

means to promote U.S. exports. In fiscal year 1994 the United States used

the program to provide about $3.1 billion in grants, mostly to Israel and

Egypt, and $0.8 billion in loans to Greece, Turkey, and Portugal.

Applicable U.S. legislation provides that FMF grants are generally intended

to fund purchases of U.S. military goods and related services. It is unlikely

U.S. contractors would lose sales to foreign competitors for FMF

grant-funded purchases.10 The U.S. government is fully funding the

purchase of U.S. military goods and services by other countries, thus

giving U.S. companies an advantage over foreign competitors that are only

offering government guarantees on loans. In addition, in fiscal year 1994,

the Defense Security Assistance Agency waived about $273 million in

research and development costs on foreign military sales to nine allied

countries.

U.S. commercial banks provide some financing of defense exports;

however, the U.S. government does not guarantee such financing. The

Export-Import Bank of the United States is prohibited from providing

9

The fiscal year in the United Kingdom is from April 1 of one year to March 31 of the following year.

10See Military Exports: Concerns Over Offsets Generated With U.S. Foreign Military Financing

Program Funds (GAO/NSIAD-94-127, June 22, 1994).

Page 10 GAO/NSIAD-95-86 Military Exports
B-260186 

loans or guarantees for purchasing defense articles or services unless

requested to do so by the President.11 Limited export financing is also

provided at the state level. For example, from July 1988 to November 1994

the state of California provided about $26 million in loan guarantees to

California-based defense companies.

Advocacy on Behalf of

Defense Companies

The French and U.K. governments have historically sent high-level

government officials, such as ministers of defense, ambassadors, or prime

ministers, to persuade foreign buyers to buy their national defense

products. The German government has generally avoided using high-level

government officials to promote defense exports, in part because defense

exports are a politically sensitive issue in Germany. In the United States,

defense exports have traditionally been approved to further U.S. national

security and foreign policy goals. Nevertheless, as part of the U.S.

government’s emphasis on overall export promotion efforts, high-ranking

U.S. officials have been increasingly willing to intervene to influence

competitions in favor of U.S. defense companies. However, DOD policy

indicates that U.S. officials should support the marketing efforts of U.S.

companies but maintain strict neutrality between U.S. competitors.

During the competition for the United Kingdom’s Skynet-4 Satellite launch

vehicle, U.S. government officials intervened at a high level on behalf of

U.S. defense exporters. According to an industry representative involved

in this sale, the U.K. Ministry of Defence split the contract between the

U.S. company and the French as a result of intervention by the U.S.

Ambassador and the Secretary of Commerce. The official stated that

without U.S. government involvement, the French manufacturer would

have received the entire $1-billion contract.

Organizations That

Support Defense Exports

France and the United Kingdom each have a single organization within

their respective defense ministries with responsibility for identifying

defense export opportunities abroad, promoting and facilitating defense

exports, providing assistance with defense equipment demonstrations and

trade shows, and providing advice to industry regarding offsets. In France

this organization is known as the Delegation for International Relations. In

the United Kingdom this organization is known as the Defence Export

11Recent legislation (P.L. 103-428-Oct. 31, 1994) allows the Export-Import Bank to provide financing on

its own initiative, subject to certain conditions, for the export of nonlethal defense articles and

services when the primary end use will be for civilian purposes. The new law provides an exception to

the previous prohibition on the Bank financing of exports of any defense articles and services, but only

in those cases where the article to be exported is both nonlethal and the primary end use is for civilian

purposes, for example, radar for air traffic control systems.

Page 11 GAO/NSIAD-95-86 Military Exports
B-260186 

Services Organisation. Although Germany does not have a defense

ministry organization comparable to that of France or the United

Kingdom, German companies involved in cross-border collaborative

efforts with those countries are able to benefit indirectly from the export

promotion activities of the French and U.K. organizations. While the

United States has no centralized government organization with a

comparable export promotion role, the Departments of Defense,

Commerce, and State each provide similar support for U.S. defense

exports.

Agency Comments The Departments of Commerce, Defense, and State were given the

opportunity to comment on a draft of this report. Defense concurred with

the report. Commerce wrote that it had reviewed the draft report and did

not have any comments. State, in general, agreed with our analysis and

conclusions and found the draft report to be an accurate reflection of the

international competition for military export contracts.

State also commented that offsets play a major role in determining which

firms obtain contracts and foreign governments are eager to support offset

arrangements to obtain a competitive advantage. In addition, State noted

that sales of conventional arms are a legitimate instrument of U.S. foreign

policy deserving U.S. government support when they help friends and

allies deter aggression, promote regional stability, and increase

interoperability of U.S. and allied forces. However, State pointed out that

an examination of the dynamics of regional power balances and the

potential for destabilizing changes in the region is required for each

specific sale.

We have made minor factual revisions to the report where appropriate

based on technical comments provided by Defense and State.

We did our work between January 1994 and February 1995 in accordance

with generally accepted government auditing standards. A discussion of

our scope and methodology is in appendix I. More information on

government support to enhance the competitiveness of defense products

is provided in appendix II. The comments of the Departments of Defense,

State, and Commerce are presented in appendixes III, IV, and V,

respectively.

Page 12 GAO/NSIAD-95-86 Military Exports
B-260186 

We are sending copies of this report to the Secretaries of Defense,

Commerce, and State and the appropriate congressional committees.

Copies will also be available to other interested parties on request.

Please contact me at (202) 512-4587 if you or your staff have any questions

concerning this report. Other major contributors to this report are listed in

appendix VI.

David E. Cooper

Director, Acquisition Policy, Technology,

 and Competitiveness Issues

Page 13 GAO/NSIAD-95-86 Military Exports
B-260186 

List of Committees

The Honorable Mark O. Hatfield

Chairman

The Honorable Robert C. Byrd

Ranking Minority Member

Committee on Appropriations

United States Senate

The Honorable Strom Thurmond

Chairman

The Honorable Sam Nunn

Ranking Minority Member

Committee on Armed Services

United States Senate

The Honorable Jesse Helms

Chairman

The Honorable Claiborne Pell

Ranking Minority Member

Committee on Foreign Relations

United States Senate

The Honorable Bob Livingston

Chairman

The Honorable David Obey

Ranking Minority Member

Committee on Appropriations

House of Representatives

The Honorable Floyd Spence

Chairman

The Honorable Ronald V. Dellums

Ranking Minority Member

Committee on National Security

House of Representatives

The Honorable Benjamin A. Gilman

Chairman

The Honorable Lee Hamilton

Ranking Minority Member

Committee on International Relations

House of Representatives

Page 14 GAO/NSIAD-95-86 Military Exports
Page 15 GAO/NSIAD-95-86 Military Exports
Contents

Letter 1

Appendix I 

Scope and

Methodology

18

Appendix II 

Types of Government

Assistance

20

Defense Export Financing 20

Advocacy by High-Level Government Officials 22

Organizational Entities That Support Defense Exports 22

Appendix III 

Comments From the

Department of

Defense

26

Appendix IV 

Comments From the

Department of State

28

Appendix V 

Comments From the

Department of

Commerce

31

Appendix VI 

Major Contributors to

This Report

32

Figures Figure 1: 1990 Global Arms Deliveries, by Supplier 5

Figure 2: 1993 Global Arms Deliveries, by Supplier 6

Figure 3: Defense Orders, 1990-1993 7

Page 16 GAO/NSIAD-95-86 Military Exports
Contents

Abbreviations

CRS Congressional Research Service

DCI Défense Conseil International

DESO Defense Export Services Organisation

DOD Department of Defense

DRI Delegation for International Relations

ECGD Export Credits Guarantee Department

FMF Foreign Military Financing

FMS Foreign Military Sales

OMB Office of Management and Budget

OTA Office of Technology Assessment

Page 17 GAO/NSIAD-95-86 Military Exports
Appendix I 

Scope and Methodology

Because of the continuing debate on how much support to provide to

defense exporters, we reviewed conditions in the global defense export

market and the tools used by France, Germany, the United Kingdom, and

the United States to enhance the competitiveness of their defense exports.

Specifically, we compared the U.S. position in the global defense market

relative to its major competitors and analyzed the various factors that can

contribute to a sale, including export financing and other types of

government support.

For our review, we selected France, Germany, and the United Kingdom

because they (1) represent the major competitors to U.S. defense

exporters in terms of the value of exports sold and (2) sell to

approximately the same buyers. In 1993 these four countries represented

81 percent of the world’s total defense market. Together, Russia and China

represented 13 percent of the total market, but were not part of this review

because a large share of Russian and Chinese defense products are sold to

countries to which the United States would not sell.

While several U.S. government agencies collect information on defense

exports, it is difficult to compare their analyses because each agency uses

different methodologies for collecting and reporting the data. We used

mostly Congressional Research Service (CRS) data on defense exports for

calendar years 1990 to 1993 to compare the U.S. position in the global

defense market relative to its European competitors. We also used more

current data on French defense exports, in terms of deliveries, provided by

the U.S. government. This new data increased the level of French defense

exports, both in absolute and relative terms, previously reported by CRS.

Further, we use calendar year data rather than fiscal year data because

data on European defense exports is reported on a calendar year basis. We

did not independently verify CRS data, but the data is generally accepted

among government agencies as dependable. In addition, we used the State

Department’s Office of Defense Trade Controls data on deliveries of U.S.

direct commercial sales, because CRS does not include that data in its

annual reports on global arms sales.

To determine the U.S. position in the global defense market in the near

future, we used the value of U.S. defense orders as reported by CRS.

However, the value of these orders includes only those placed through the

Foreign Military Sales program and does not include orders placed by

direct commercial means. While the State Department reports the value of

export licenses approved for direct commercial sales, it does not report

the value of actual defense orders placed as a result of those licenses. The

Page 18 GAO/NSIAD-95-86 Military Exports
Appendix I 

Scope and Methodology

value of direct commercial sales deliveries as a result of those licenses,

according to government documents, may be as little as 40 to 60 percent of

the value originally reported when the license was approved. The State

Department reported that it issued about $87 billion in licenses from fiscal

year 1990 to 1993.

In analyzing the various factors that contributed to winning a defense sale,

we held discussions with U.S. government and defense company officials

responsible for tracking U.S. defense sales. In addition, we reviewed prior

government reports on the subject.

To obtain information on U.S. defense export promotion efforts, we

reviewed numerous government and nongovernment studies and reports

on the subject. In addition, we interviewed officials at the Departments of

Defense, Commerce, and State, and the Defense Security Assistance

Agency; U.S. defense company officials located in the United States and

Europe; and trade organizations. We also spoke to officials from the Office

of Management and Budget, the Export-Import Bank, the Banker’s

Association for Foreign Trade, and six commercial banks, to obtain

additional information on defense export financing.

To obtain information on European countries’ export promotion

programs, we discussed with, and analyzed documents from, officials

involved in their countries’ defense export promotion activities. This

group included officials from national governments, academia, and

European defense companies. We also met with officials from the

Department of Defense’s Office of Defense Cooperation and the

Department of Commerce’s U.S. and Foreign Commercial Service offices.

We also attended the Eurosatory Land Show in Paris, France, to observe

U.S. exporters and their competitors at a major defense trade show.

To convert French francs and British pounds to U.S. dollars, we used the

following exchange rates. To report on France’s Delegation for

International Relations annual budget, we used the average calendar year

1994 exchange rate. To report on the U.K.’s Defence Export Services

Organisation annual budget and the amount of defense export financing

provided by the Export Credits Guarantee Department, we used the

exchange rate at the end of the U.K. fiscal years ending March 31, 1993,

and March 31, 1994.

We sought to report on multilateral agreements on defense trade and

found that no such agreements exist.

Page 19 GAO/NSIAD-95-86 Military Exports
Appendix II 

Types of Government Assistance

Defense Export

Financing

Approaches to financing defense exports vary among the four countries.

Such financing includes the use of various financial instruments, including

grants, loans, and guarantees.

U.S. Defense Export

Financing Primarily

Provided Through the

Foreign Military Financing

Program

In the United States, most financing is provided through the government’s

Foreign Military Financing (FMF) program, with limited financing provided

by commercial banks. Some financing is also available at the state level. A

1992 decision to cancel fees on some sales that recovered part of the

government’s investment in a weapon system was made to increase the

competitiveness of U.S. firms.

In fiscal year 1994 the United States used the FMF program to provide

about $3.1 billion in grants—mostly to Israel and Egypt—and $0.8 billion

in loans to Greece, Turkey, and Portugal. The FMF program enables U.S.

allies to buy U.S. defense goods and related services and training.

Congress often specifies the extent of assistance to certain countries. Most

grants and loans are used to purchase U.S. defense products, although a

designated amount of FMF funding is permitted to be spent on procurement

in Israel. In fiscal year 1994 Israel was permitted to spend at least

$475 million of its grant assistance on procurement in Israel. The FMF

program has decreased since 1990, when the program provided over

$4.8 billion in loans and grants.

The U.S. government does not guarantee commercial financing for defense

exports. Further, the Export-Import Bank of the United States is

prohibited from providing loans or guarantees for purchasing defense

equipment. Therefore, according to U.S. bank officials, U.S. commercial

banks provide few financial services for defense exports, partly because of

concerns that such services might generate negative publicity. Senior bank

managers approve defense export financing transactions on a case-by-case

basis. Financing is provided for defense transactions that are low risk and

will carry a short repayment schedule. According to bank officials,

repayment terms of commercial loans for defense exports generally do not

exceed 2 years. These officials further stated that commercial banks are

reluctant to provide financing to foreign countries without some type of

U.S. government guarantee program. Moreover, even with such a program,

some banks would still be reluctant to provide financing to defense

exports, because of concerns about negative publicity.

Some export financing is provided at the state level. For example, the state

of California provides export financing for its defense companies. From

Page 20 GAO/NSIAD-95-86 Military Exports
Appendix II 

Types of Government Assistance

July 1988 through November 1994 California provided about $26 million in

loan guarantees for 77 transactions to California-based defense

companies. At the time of this review, 30 states provided export financing.

However, data on export financing is not separated out by defense and

nondefense exports; therefore, we were not able to determine how many

states, other than California, provided financing for defense exports.

For years the price of U.S. military exports generally included a

Department of Defense (DOD) charge to recover a portion of its

non-recurring research and development costs. In 1992 the policy of

recovering these costs when the sales were directly between the U.S.

contractor and a foreign government was canceled. The recovery of U.S.

government costs were canceled in an effort to increase the

competitiveness of U.S. firms in the world market. In addition, the Arms

Export Control Act, which generally requires recovery of such costs on

government to government sales, permits DOD to waive or reduce such

charges on sales to North Atlantic Treaty Organization countries,

Australia, New Zealand, and Japan in furtherance of standardization and

mutual defense treaties. In fiscal year 1994, DOD recovered $181 million in

such costs but waived about $273 million. Recently, the executive branch

has proposed that Congress repeal the requirement to collect such charges

on future government to government sales.

European Export

Financing Provided

Through

Government-Backed

Export Credit Guarantees

All three European countries provide some form of government-backed

export credit guarantees for both nondefense and defense exports. Export

credit guarantees are a form of insurance covering risk of loss due to such

factors as exchange rate fluctuations or buyer nonpayment. They can

allow access to financing for exporters extending credit to their buyers

and for overseas buyers borrowing directly from banks. Data on the value

of guarantees for defense exports, however, was available only in the

United Kingdom. France and Germany report total export financing and do

not differentiate between defense and nondefense export financing. Thus,

we were unable to obtain information on the extent of guarantees

provided to defense exports in either country.

During fiscal year 1993/1994, the United Kingdom’s Export Credits

Guarantee Department (ECGD) guaranteed about $6.1 billion in exports, of

which $2.9 billion (or 48 percent) was for defense exports. About 

90 percent of the $2.9 billion was for defense equipment sold to countries

in the Middle East, mostly to Kuwait, Oman, Qatar, and Saudi Arabia.

Among industry sectors, military aircraft represented about 40 percent of

Page 21 GAO/NSIAD-95-86 Military Exports
Appendix II 

Types of Government Assistance

the $2.9 billion total, military vehicles represented about 39 percent, and

naval vessels represented about 21 percent. In fiscal year 1992/1993, ECGD

guaranteed about $5.8 billion in exports, of which $2.4 billion 

(or 42 percent) was for defense exports. About 57 percent of the 

$2.4 billion was for defense equipment sold to countries in the Far East

and about 43 percent of the total was for equipment sold to the Middle

East. Among industry sectors, naval vessels represented about 39 percent

of the $2.4 billion total, military aircraft represented about 32 percent, and

munitions and missiles represented about 27 percent.

Advocacy by

High-Level

Government Officials

The French and U.K. governments have historically sent ministers of

defense, ambassadors, or prime ministers to persuade foreign buyers to

buy their national defense products. The German government has

generally avoided using high-level government officials to promote

defense exports, in part because such exports are a sensitive political

issue in Germany. In the United States, defense exports have been

approved to further U.S. national security and foreign policy goals.

Nevertheless, as part of the U.S. government’s emphasis on overall export

promotion efforts, high-ranking U.S. officials have been increasingly

willing to intervene to influence competitions in favor of U.S. defense

companies.

An example of high-level government advocacy is the Swedish

government’s purchase of the German Leopard 2 tank. The German

Chancellor and Minister of Defense advocated on behalf of the German

Leopard 2 tank, which, according to U.S. government officials, led to

Sweden purchasing it over the French or U.S. tank. Other factors

contributing to Sweden’s choice included the German manufacturer’s

promise to buy Swedish defense material and services worth full value of

the tanks they were exporting to Sweden.

Organizational

Entities That Support

Defense Exports

France and the United Kingdom each have a single organization within

their respective defense ministries with responsibility for identifying

defense export opportunities abroad, promoting and facilitating defense

exports, providing assistance with defense equipment demonstrations and

trade shows, and providing advice to industry regarding offsets. Although

Germany does not have a defense ministry organization comparable to

those of France or the United Kingdom, German companies involved in

cross-border collaborative efforts with those countries are able to benefit

indirectly from the export promotion activities of the French and U.K.

Page 22 GAO/NSIAD-95-86 Military Exports
Appendix II 

Types of Government Assistance

organizations. While the United States has no centralized government

organization with a comparable export promotion role, several U.S.

government agencies provide similar support for U.S. defense exports.

France and the United

Kingdom Each Have a

Single Organization to

Support Defense Exports

In France, the Ministry of Defense’s Delegation for International Relations

(DRI) is responsible for facilitating and promoting French global defense

sales. DRI assigns defense attachés overseas to promote military and

armament relations with other countries. DRI also subsidizes missions for

small business to participate in events such as trade shows. DRI employs

roughly 200 staff—about 60 are involved in facilitating and promoting

defense sales with the remaining staff involved in export control activities

and oversight of cooperation activities with allied nations. DRI has an

annual budget of $7 million which is used in a variety of ways, including

Ministry of Defense participation in trade shows and subsidizing small

business missions to participate in those shows. DRI also serves as a liaison

between the Ministries of Defense and Industry, which, according to DRI

officials, is the most important support provided to the French defense

industry. While DRI promotes and facilitates sales, sales are primarily

handled either by defense companies themselves or by various marketing

and sales organizations. The French government owns 49.9 percent of the

Défense Conseil International (DCI). DCI serves as a consultant to buying

countries to help them define their operational needs, weapon

requirements, and specifications. The remaining 51.1 percent is owned by

private-sector marketing and sales organizations.

In the United Kingdom, the Ministry of Defence’s Defence Export Services

Organisation (DESO) is responsible for assisting in the marketing and sales

efforts of U.K. defense companies overseas, whether manufactured

nationally or in collaboration with others. DESO serves as a focal point for

all defense sales and service matters, including advising firms on defense

market prospects on a worldwide, regional, or country basis; providing

marketing and military assistance in support of sales; organizing

exhibitions, missions, and demonstrations; providing advice on export and

project financing; ensuring that overseas sales consideration is given due

weight in the U.K. Ministry of Defence’s own procurement process;

briefing companies new to the defense sector and to exporting; and

monitoring offset agreements. DESO’s budget for fiscal year 1992/1993 was

about $25.9 million. DESO has approximately 350 staff—about 100 in

marketing services, 50 in general policy, and 200 in direct project work.

DESO concentrates primarily on supporting higher-value exports, although

smaller companies also benefit from DESO guidance on such matters as

Page 23 GAO/NSIAD-95-86 Military Exports
Appendix II 

Types of Government Assistance

how best to pursue potential subcontracts. In addition, larger companies

rely on DESO to serve as a liaison with high-level U.K. and foreign

government officials.

Several U.S. Government

Agencies Provide Support

of Defense Exports

The Departments of Defense, Commerce, and State each provide support

in promoting U.S. defense exports. Moreover, the U.S. government has

long recognized the positive impact that defense exports can have on the

defense industrial base.

Beginning in 1990 the U.S. government began to give more prominence to

the economic value of defense exports. At that time, the Secretary of State

directed overseas personnel to assist defense companies in marketing

efforts. The Secretary added that individuals marketing U.S. defense

products should receive the same courtesies and support offered to

persons marketing any other U.S. product.

More recently, the U.S. government announced its National Export

Strategy, which is designed to establish a framework for strengthening

U.S. export promotion efforts. Although the strategy does not target

defense exports, some recommendations for improving export promotion

activities could benefit defense exports. For example, the strategy

recommended that overseas posts prepare country commercial guides.

The guides are to include information on the host country’s best export

prospects for U.S. companies, which may include defense exports. These

guides are to be made available to the public through the Department of

Commerce’s National Trade Data Bank.1

In February 1995, the President announced his conventional arms transfer

policy which included, as one of its principal goals, enhancing the U.S.

defense industry’s ability to meet U.S. defense requirements and maintain

long-term military technological superiority at lower costs. The

announcement indicated that once a proposed arms transfer is approved,

the U.S. government will take such steps as (1) tasking U.S. embassy

personnel to support overseas marketing efforts of American companies

bidding on defense contracts, (2) actively involving senior government

1

The National Trade Data Bank is a computerized information system containing export promotion

and international trade data collected by 17 U.S. government agencies. The data bank is released on

CD-ROM disks.

Page 24 GAO/NSIAD-95-86 Military Exports
Appendix II 

Types of Government Assistance

officials in promoting sales of particular importance to the United States,

and (3) supporting DOD participation in international air and trade shows.2

As part of the U.S. security assistance program, the Defense Security

Assistance Agency and the military services implement the Foreign

Military Sales program, through which most U.S. defense sales are made.

U.S. security assistance personnel stationed overseas are primarily

responsible for security assistance and defense cooperation activities in

the host country. When requested, these personnel provide information

and support to U.S. industry on business opportunities in the host country,

including information on the buying countries’ defense budget cycle,

national procurement process, and estimates of equipment the country

currently needs to fill defense requirements or likely future procurement

plans. In addition, the Defense Security Assistance Agency coordinates

DOD participation in international air shows and trade exhibitions. The

military services lease equipment to U.S. defense companies for display or

demonstration at such events.

The Department of Commerce has primary responsibility for export

promotion and has recently expanded its export promotion activities to

include defense exports. For example, Commerce prepares market

research reports on various countries. These reports identify trade

opportunities in the host country, including those in defense trade. Other

information on the host country included in these reports includes

information on market assessment, best sales prospects, the competitive

situation, and market access. These reports are made available to the

public through the National Trade Data Bank. Other activities include

preparing U.S. and Foreign Commercial Service Officer guidance on

supporting defense exports. This guidance directs officers to provide

information similar to that provided by the Defense Security Assistance

Agency and the military services. Moreover, the Departments of

Commerce, State, and Defense participate in defense industry liaison

working groups to assess improving U.S. government support for U.S.

defense exporters.

2

The announcement recognized that, in accordance with existing law, participation in such exhibitions

must have the Secretary of Defense’s determination that participation would be in the national interest

and Congress must be notified.

Page 25 GAO/NSIAD-95-86 Military Exports
Appendix III 

Comments From the Department of Defense

Note: GAO comments

supplementing those in the

report text appear at the

end of this appendix.

See comment 1.

Page 26 GAO/NSIAD-95-86 Military Exports
Appendix III 

Comments From the Department of Defense

The following is GAO’s comment on the Department of Defense’s (DOD)

letter dated March 8, 1995.

GAO Comment 1. We have not included DOD’s technical annotations to our draft report

but have incorporated them in the text where appropriate.

Page 27 GAO/NSIAD-95-86 Military Exports
Appendix IV 

Comments From the Department of State

Note: GAO comments

supplementing those in the

report text appear at the

end of this appendix.

Page 28 GAO/NSIAD-95-86 Military Exports
Appendix IV 

Comments From the Department of State

See comment 1.

See comment 1.

See comment 2.

Page 29 GAO/NSIAD-95-86 Military Exports
Appendix IV 

Comments From the Department of State

The following are GAO’s comments on the Department of State’s letter

dated March 17, 1995.

GAO Comments 1. We have modified the report to reflect this comment.

2. We have not included the attached list of suggested editorial changes

but have incorporated them in the text where appropriate.

Page 30 GAO/NSIAD-95-86 Military Exports
Appendix V 

Comments From the Department of

Commerce

Page 31 GAO/NSIAD-95-86 Military Exports
Appendix VI 

Major Contributors to This Report

National Security and

International Affairs

Division, Washington,

D.C.

Ernest A. Doring

John Neumann

Katherine V. Schinasi

James F. Wiggins

European Office,

Frankfurt, Germany

Mary R. Offerdahl

Cherie M. Starck

(705042) Page 32 GAO/NSIAD-95-86 Military Exports
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