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. Defense exports in general have a positive impact on the balance of trade. 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. 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. While the global defense export market has declined since the late 1980s, the United States has become the world’s leading defense exporter. 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. 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. 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. *Includes all other European countries, except France, Germany, and the United Kingdom. *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 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. 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 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. 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. 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, we noted the importance of offsets to a buying country when deciding between competitors in a defense sale. 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. 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. 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,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.