Arms Sales Monitor #26, July 1994

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No. 26 (30 July 1994)


Policy Review Nearing Completion...Maybe

The interagency review of conventional arms transfer policy initia- ted last September (see ASM No. 24) has been side-tracked by crises in North Korea and elsewhere. The policy directive, promised at the first of the year, is not expected until late August at the earli- est.

Thus far, the National Security Council has compiled an options paper (Presidential Review Document-41), with input from the State, Defense and Commerce Departments and the Arms Control and Disarma- ment and Central Intelligence Agencies. Proposals from interested parties---industry and arms controllers---were solicited.

The first senior (undersecretary-level) meeting to review and select from the options was held recently. Based on this meeting, the State Department and NSC drafted a "Presidential Decision Directive" (PDD)---the actual statement of policy. Not surprisingly, the various agencies involved sometimes have competing agendas, and several points remain in dispute, including the role of arms control (if any) and the issue of arms export fi- nancing (see p. 4). A second (and perhaps third) high-level meeting will eventually be called to hash out a compromise.

Meanwhile, the deadline for a relevant report by an independent commission passed on 1 June. The report was mandated in last year's DOD authorization bill (see ASM No. 23 p. 9). The commission---not yet empaneled---was to have studied factors contributing to the spread of strategic and advanced conventional weapons, and policy options to inhibit such proliferation.

An aide to Rep. John Kasich (R-OH), the sponsor of the measure, hesitated to make any "rash judgments" about when the panel may be up and running. Panelists have been selected and background checks are now being conducted, he said. Since the Administration will (presumably) finish its review before the panel does, its influence is questionable.

Control and Promotion Being Considered

Undersecretary of State Lynn Davis explained at a hearing last November that, "The policy review will focus on two broad lines of inquiry: the utility of enhancing transparency and/or limiting supplies of conventional arms (either by region or type) and the appropriateness of adopting measures to promote U.S. conventional arms exports." She added, "Naturally, there will be some tension between these two lines of inquiry."

On the first track---restraint---Davis said the Administration has no intention of re-starting talks among the Permanent Five members of the UN Security Council, initiated after the 1991 Gulf War. "[W]e see the successor regime to COCOM as the appropriate group that would now seed...consultations and prior notification" of arms exports. The P-5 talks focused on the entire Middle East. The Administration's plan for COCOM (still under negotiation, having failed to reach agreement by a 1 April deadline; see ASM No. 24 p. 4) is to focus solely on exports to America's list of "rogue" states: currently Iran, Iraq, Libya, North Korea.

On export promotion, Davis said "the review will examine the chang- ing domestic and international arms market, the relationship among exports, jobs and the defense industrial base, and the proper role for the government to play to ensure a level international playing field for U.S. defense firms. This will include the government's role in marketing, export financing, and internationalization of U.S. defense procurement."

"The review will examine how efforts at cooperative defense conver- sion in the states of Central/Eastern Europe and the former Soviet Union could help achieve our conventional arms transfer policy goals."

(U.S. Nonproliferation Policy (hearing of the House Foreign Affairs Cmte.) US GPO: 1994, p. 80)

QUOTE: "The United States also will not support sales that we be- lieve will threaten our own forces or those of our friends and al- lies."---Secretary of Defense William Perry describing the evolving U.S. conventional arms export policy to Sen. Dale Bumpers (letter printed in Inside the Navy, 4 July 1994)

Taxpayers Will Foot Bill at Farnborough

In a memo dated 31 May, Deputy Secretary of Defense John Deutch stated that "it is in the national security interests of the United States for DOD to participate directly in the Farnborough [U.K.] International Air Show." The show will be held on 5-11 September 1994.

This marks the third time that `national security' has been invoked to justify the use of Pentagon funds for arms marketing (see ASM No. 25 p. 6). The estimated cost to taxpayers of flying or otherwise transporting weapons to the show, displaying and insuring them is $500,000.

According to Deutch, public money is justified in order to demon- strate the United States' commitment to European security; to promote interoperability of weapons with NATO partners and Eastern European countries; and to promote economic competitiveness.

Commerce Aims to Please in Paris

In March, the Department of Commerce (DOC) solicited comments on its performance, since 1985, as manager of the "USA National Pavilion" at the biennial Paris Air Show. A questionnaire in the 7 March Federal Register (pp. 10610-12) asks industry and other interested parties to rate the importance of the following forms of U.S. government support:

* "Active written/oral support by the DOC on behalf of your company in a major international procurement or competition." * "Reception sponsored by the U.S. Government at the American Am- bassador's residence." * "President's Official Representative to the Paris Air Show. Example: Secretary of Commerce Ronald H. Brown at the 1993 Paris Air Show Opening." * "DOC assistance in arranging visits by foreign government/buyer delegations to the Paris Air Show."

The survey will be used to help determine "the appropriate role, if any, of the U.S. Government" at the show.

More Members See Need for Code of Conduct on Arms Transfers

The Code of Conduct on Arms Transfers (see ASM No. 23) is gathering momentum in the House of Representatives. Thanks to energetic and persuasive lobbying by its sponsor, Rep. Cynthia McKinney, one in five Representatives now cosponsors the bill (H.R.3538). As of 25 July, 100 members had signed on.

Do As We Say...

The following exchange occurred at a hearing of the House Foreign Affairs Committee on 10 November 1993.

Rep. Christopher Smith: [T]here is a great deal of hope and ex- pectation...with the recent signing between the PLO and Israel, but it would seem that the prospects of considerable arms sales to the Middle East will be unabated....[W]hat should we be doing to try to curb that massive inflow of conventional armaments...?

Undersecretary of State Lynn Davis: ...[L]et me talk as to how I see the role of arms sales in that critical region. Arms sales are appropriate to responsible allies, and that is where our sales have been going in the follow-on to the Gulf War, to allay the insecuri- ties in the Middle East and the Gulf felt by the threats posed by Iran, among other states....[S]ecurity is tied to responsible arms sales. And we certainly are going to continue to provide those to our key allies and friends in that region....[T]he Middle East peace process is a real opportunity to bring peace, and in that context, there is a role for arms control..., but let no one doubt that we would be prepared to transfer those arms necessary for the security of our friends and allies....

Chairman Lee Hamilton: Madam Secretary, we are pouring arms into the Middle East. Do you find it difficult to urge others to practice restraint in conventional arms sales around the world, or to the Middle East, given that we are such a massive seller of arms? How can we have credibility with other nations...?

Davis: We can have credibility by the fact that the transfers that we are making are for legitimate security reasons and they are not done to those countries that---

Hamilton: Madam Secretary, I have never heard of an arms sale being made that wasn't justified on the basis of a legitimate national security need....That is an automatic rationale for every sale. I am just asking, if we pour these arms in ourselves, do you find that a handicap as you urge other nations to restrain arms sales?

Davis: Some will use that argument against our proposals, but again, it is in the...context of...how what we restrain contributes to security and peace, and how in a multilateral way among the major suppliers...we can use our policies with respect to sales and to their restraint to assert peace and security. ...

Hamilton: We have been very exercised about the sale of submarines by Russia to Iran. Russia says that is a legitimate sale for legitimate self-defense purposes there. Are we in any way undercut when we object to the Russians about that sale, given our own sales to the region?

Davis: It is not a question of whether they come back with that, but whether or not we seek---

Hamilton: That is not my question.

Davis: We can have debating points, but the real point here is---

Hamilton: I am asking what the Russians say. Do they raise that question?

Davis: They would use that argument, and it is not persuasive.- ...[b]ecause the dangers Iran poses are very serious, and we seek to keep the trade in arms to Iran from occurring.

Hamilton: That is not persuasive to the Russians, I presume?

Davis: Well, at this point, they still are trading in arms with Iran... U.S. Nonproliferation Policy, op cit., pp. 27-29

Naval Intelligence Finds Weapons Exports Threatening

The Office of Naval Intelligence (ONI) monitors the capabilities of foreign maritime forces that could threaten the U.S. Navy or U.S. allies. In late May, Rear Adm. Edward Shaefer, the Director of ONI, released his annual threat assessment. Nearly every danger identified in the glossy report derives from the international arms trade.

The report notes that the quantity of global weapons exports has decreased over the past decade (due mainly to a dramatic decline in Russian exports and an end to U.S. and Soviet support for several Third World proxy wars), but "the overall technical threat and lethality of the arms still being exported have never been higher." Citing Russian and European models, Shaefer says extremely advanced weapons "are being advertised or exported with seemingly little consideration for their effects on regional political-military balances." (He does not mention exports of advanced American weaponry.)

Shaefer states, "During the next 20 years, the principal threat to U.S. Navy surface forces will come from the over 100 different current, developmental, or planned ASCMs [anti-ship cruise missiles] of varying capabilities.... France, Russia, the United States, and China produce the majority of widely-exported ASCMs". (Shaefer claims that the threat posed by Russian anti-ship missiles has actually increased in the wake of the Cold War, "due to the possibility of their proliferation to countries with whom we may come into conflict.") Italy, Germany, Taiwan, Israel, Sweden, Japan, and Norway are also producing or developing ASCMs. These "future ASCMs will be more capable...potentially more easily avail- able or affordable, and harder to detect and counter."

Naval mines and torpedoes on the market also pose a hazard. "Both obsolescent and modern mines will continue to be widely available-- -possibly even to terrorist and criminal organizations---and a num- ber of suppliers are offering conversion kits to upgrade older sys- tems with newer, more sensitive, and less counter-measurable ex- ploder systems."

ONI says that the spread of submarine technology is a "major concern," given the difficulty of tracking modern, quiet diesel attack subs, but the report notes that "against Western submarines and surface combatants, the threat today is low." Shaefer adds, though, that some countries are considering acquiring small submarine fleets, "primarily in response to the perceived plans of their neighbors to do likewise," and he cautions that "the potential for relatively modern submarine systems being exported to unfriendly nations must remain a major concern."

As a result, ONI has stepped up its analysis of other countries' export weapons. ONI's Foreign Material Program acquires "high- threat foreign weapons systems to allow the Navy to develop weapons, equipment, and tactics to neutralize them."

Shaefer darkly hints that conflicts among exporters, engendered by arms sales, are potentially more dangerous even than the weapons themselves. He says, "Arms sales, for example, were the area where the vaunted future partnership with a newly democratizing Russia first broke down as we watched the delivery of KILO Class subma- rines to Iran and the transfer of space launch vehicle technology to India." He later contends that relaxing the UN-levied arms embargo against Iraq would "almost certainly lead...to strains among non-regional nations that might be tempted to aid Iraqi efforts for short-term economic reasons."

Threats and Market Opportunities

The following is taken from regional overviews in the 1994 Director of Naval Intelligence Posture Statement. Latin America "The U.S. Navy has sought new forms of cooperation with Latin American navies. The focus is no longer on assistance against potential Soviet submarines and surface action groups....[T]he focus is now on assistance in international peace- keeping, counternarcotics, and shallow-water operations....The most significant acquisitions of major combatants probably will be surplus frigates and amphibious ships offered for lease from the United States....The foreign market for inexpensive Latin American low-technology weapons has largely evaporated, and few states have successfully marketed military equipment in recent years."

Asia/Pacific "Six of the world's nine most numerous military forces are in Asia....The region continues to be the globe's most dynamic arms market....[M]any countries could dramatically increase their military acquisition budgets without significant economic repercussions."

Europe Shaefer warns that the negative "Greco-Turkish dynamic has been exacerbated by a continuing Aegean naval buildup prompted by Western naval surplus disposals. Greece has acquired virtually a completely modernized surface force from the United States, Germany, and the Netherlands....In order to redress the naval bal- ance in the Aegean, Turkey has found it necessary to accept U.S. Navy offers for eight KNOX Class frigates." The two NATO members are at odds over Cyprus, ethnic minority populations, territorial waters, Aegean seabed exploitation, NATO commands, and the Balkan conflict.

Persian Gulf Shaefer asserts that "Iran's acquisition of KILO Class submarines and lethal naval weapons demonstrates its continuing policy of trying to intimidate and manipulate the governments of the southern Persian Gulf." He later acknowledges, though, that Iran's fleet "still consists predominantly of aged units while its neighbors across the Persian Gulf are investing heavily in new naval equipment. Plans to modernize Iran's military forces have been, and will continue to be, inhibited by economic difficulties."

Export Financing: Industry Works Two Tracks for Loan Guarantees

Since 1989, the U.S. arms industry has pushed relentlessly (and creatively) for new forms of government financing for foreign arms sales. In the post-Cold War era, U.S. arms manufacturers consider exports vital to their corporate health, and obtaining new sources of export financing appears to be their highest priority.

The industry argues that it faces an "unlevel playing field" vis a vis European competitors, whom they charge receive much greater government marketing and financing assistance. However, the United States already has a military aid program in place, which financed nearly $4 billion of arms exports in FY 1994. The vast majority of this aid was outright grants, but nearly $800 million dollars of loans were also provided.

Opposition to foreign aid has increased in the past few years, resulting in reductions in military aid outlays and restricting this year's $4 billion to only handful of countries. Industry is seeking to reverse this trend, arguing that U.S. government guaran- tees for commercial loans would finance exports on the cheap.

But guarantees are needed precisely because the recipient is a credit risk, unable to obtain affordable commercial loans on its own. Many past weapons loans financed by the government have gone bad (see box), resulting in much higher costs to the U.S. than initially stated. In fact, the DOD shifted from loans into a largely grant military aid program in the early 1980s because U.S. allies were having difficulty meeting their debt payments.

The Export-Import Bank, which financed $15 billion of commercial exports in 1993, is currently prohibited by law from financing sales of defense articles and services (see box next page). After several years of unsuccessful attempts to re-establish Ex-Im Bank financing for weapons sales, the industry shifted its plan toward the establishment of a new, arms-only export financing program at the Pentagon. Now, industry has its sights set on both.

I. Ex-Im Financing for Dual-use Goods

Current Ex-Im Bank policy prohibits sales of items to military organizations, and sales of items designed primarily for military use. If an item is "dual-use", the Bank may finance it only if there is convincing evidence that the item will be used only for non-military activities.

On 29 June, the House Banking Committee passed a bill (H.R.4455) which would downgrade this policy, permitting the Bank to finance sales of non-lethal military items and services, if the primary end use is for non-military activities. The bill requires the Bank to notify the House and Senate Banking and Appropriations Committees at least 15 calendar days before the its Board of Directors gives final approval to finance such a loan. In addition, the General Ac- counting Office, in consultation with the Bank, must submit an annual report to the Committees on the end uses of any defense articles financed.

At an 8 June House Banking Committee hearing on the bill, Rep. Leslie Byrne viewed the use of Ex-Im financing as a conversion mea- sure. "I believe the Ex-Im Bank is the most appropriate vehicle for assisting defense companies to move into the commercial market- place....Using the experience of Ex-Im Bank in this way is not a hand-out to business...it is a hand-up...for defense firms to assist them to diversify their product line and market it in the commercial sector," said Byrne.

At the same hearing, Aerospace Industries Association Vice President Joel Johnson cited "air traffic control, surveillance, night vision, communications, simulation and data processing" as candidates for Ex-Im financing under this scheme.

Michael A. Smith (Vice President of Marketing for Martin Marietta) testified that Martin Marietta is pursuing a "classic example of a dual-use opportunity" in Hungary, which is currently upgrading its air traffic control system. Martin Marietta wants to sell Hungary the FPS117 radar, which is used in NATO ground surveillance radar systems. "Over 40 Martin Marietta-installed radars in nine different countries are in daily use for both air traffic control and in air sovereignty missions." However, current Ex-Im policy does not allow U.S. government financing, even though Smith estimates that "approximately 90 percent of the usage will be com- mercial."

Johnson added that "Many governments face stringent financial limitations on their defense and civilian budgets, and cannot afford to have separate infrastructures to support civilian and defense needs."

Moreover, he asserted that expanding the Bank's mandate would not cut into financing of strictly commercial endeavors. "The volume and value of products which fall into the current gray area is not large, and is likely to involve activities already financed by the Bank. For example, in 1993 the Bank financed four [civilian] air traffic control projects, which is the product area most likely to immediately benefit from a change in the Bank's charter." A floor vote on the bill has not yet been scheduled in the House, but on 15 July Sen. Alfonse D'Amato (R-NY) introduced an identical provision in the Senate (S.2289), indicating some momentum behind the bill.

II. New Defense Export Finance Facility

Authority for the Pentagon to guarantee up to $1 billion in loans for weapons exports expired, un-used, on 1 June. The program--- known as the `Kempthorne Amendment,' after its Senate sponsor---was included in last year's defense authorization act (see ASM No. 23 p. 7).

Sen. Kempthorne was planning to reintroduce a similar scheme in this year's bill, but with a new twist. Last year, pending Presidential certification of need for the program (which did not occur), Congress authorized the appropriation of $25 million to insure up to $1 billion in commercial loans. Credit reform policies enacted in 1990 mandate that whenever the U.S. government guarantees loans, money must be set aside against realistic estimates of contingent liability (the likelihood of default). Con- gress, however, did not actually appropriate the $25 million for the program.

Kempthorne's (or really the arms industry's) innovation this year was to charge either the arms purchasing country, or the arms selling corporation, a fee to cover the contingent liability of the market-rate loan. The United States government would still be liable for repayment in case of default, but no money would have to be appropriated by Congress to set aside for this risk.

If the risk assessment were done accurately, and if the program was faithfully executed, the benefit to the buying countries of such an approach is unclear, as the fee would be rather sizeable in many cases. Only in those cases where credit risk is so high that without U.S. backing obtaining a loan was impossible, would this self-financed insurance be an attractive offer.

In the end, Kempthorne did not offer his initiative as an amendment to the DOD authorization bill, reportedly due to lack of White House and Pentagon support. This may indicate that the Administration is leaning toward opposing establishment of a loan guarantee program for weapons, or it may simply mean that they are diligently trying to keep the cart behind the horse; arms export financing is under discussion in the interagency arms export policy review (see p. 1). The modified Kempthorne program is still kicking around in the Pentagon, where Defense Security Assistance Agency is trying to get the Secretary Perry to consider the program's merits.

Pentagon Loans Gone Bad

A report sent to Congress in February of this year showed nearly $18.755 billion of Pentagon-financed loans for arms exports out- standing as of 30 September 1993. The report, mandated annually by section 25 of the Arms Export Control Act, was obtained through a Freedom of Information Act request.

Thirty-six countries had outstanding loans under the Foreign Military Financing (FMF) program. The majority originated in the 1980s, although some have been on the books since the mid-1970s. The Pentagon had rescheduled many countries' debt, meaning that the borrowing country had convinced the Pentagon that, unless terms of repayment were eased, default was imminent. Several countries--- primarily Liberia, Niger, Somalia, Sudan, and Zaire---were $166 million in arrears as of 30 September. The government will likely have to write off the debt of these war-torn, impoverished countries.

In a costly case not reflected in the Pentagon report, the White House announced in November 1990, during the build up to `Operation Desert Storm', that it was forgiving $7.1 billion in weapons debt owed by Egypt. Similarly, the Clinton Administration is currently considering seeking Congressional approval to write off Jordan's nearly $400 million of military debt.

Even more expensive to taxpayers, Congress annually appropriates $1.2 billion in foreign aid (so called "Economic Support Fund") to allow Israel to meet its military debt obligations to the United States government---some $7.5 billion, according to the report. Simply writing off the Israeli debt, rather than appropriating payments, would sink Israel's credit rating with commercial lenders.

Ex-Im's History with Military Sales

In 1962 the Export-Import Bank began financing military exports to industrialized countries. Two years later, the Pentagon began to guarantee credits provided by the Ex-Im Bank for arms sales to developing countries under a so-called "country X" arrangement. For several years, Ex-Im financed these sales, which DOD negotiated, without knowing the buyers' identity or creditworthiness.

Concerned about the militarization and politicization of the Bank, Congress amended the Bank's charter in 1968, prohibiting Ex-Im from financing arms sales to developing countries. Several years later, in 1974, the Senate Banking Committee passed an amendment prohibiting the Ex-Im Bank from supporting military sales to any country. The amendment was deleted in the House-Senate conference on the bill, but the Ex-Im Bank has abided by this policy ever since, with a couple of recent exceptions.

A 1988 amendment to the Bank's charter (Drug Abuse Act of 1988), now permits financing of arms sales to developing countries in support of counter-narcotics efforts. Only one sale---military helicopters to Colombia---has been financed under this provision.

A second exception was passed the following year, in the FY 1990 foreign aid bill, which allowed the Bank to finance defense items to Turkey and Greece on a one-time basis. Under this provision, the Bank guaranteed a $1.3 billion sale of military helicopters to Turkey.

Efforts in 1991 by the Bush Administration to establish a $1 billion pilot program at Ex-Im to finance weapons exports was defeated by heavy opposition from large commercial interests, such as the National Foreign Trade Council and the National Association of Manufacturers. They feared that re-opening Ex-Im financing to military goods would displace commercial exports.

GAO Urges Banning Offsets on FMF-financed Arms Sales

As maintenance of jobs and the military industrial base has become a primary justification for U.S. weapons exports, offset agreements---the largely unregulated and secretive side deals which accompany arms sales---are receiving increased attention. On 22 June, a House Energy and Commerce subcommittee studied the impact of offsets on arms transfers purchased with U.S. military aid, known as Foreign Military Financing (FMF).

Through these side deals, a buyer seeks economic benefits to "offset" the cost of an arms purchase. Typical offsets include licensed or joint production of a weapon or its components; counter-trade, in which the seller agrees to purchase or market some of the buyer's goods; or capital investment in the purchasing country. Sellers use offsets to win sales in the competitive global market.

General Accounting Office (GAO) Assistant Comptroller Frank Conahan testified at the hearing that offsets "reduce the employment, defense industrial base, and other economic benefits that normally accrue to the United States from weapons exports. Certain types of offsets have resulted in a loss of some production work and business for U.S. prime contractors and subcontractors as well as for companies in nondefense businesses."

Every year, the U.S. government makes nearly $4 billion in FMF grants and loans. Except for $475 million of Israel's annual $1.8 billion of aid, all of this must be spent on American-made weapons. As such, these sales are not subject to international competition-- -the usual rationale for offsets. Nevertheless, current laws and policies do not prohibit offsets on FMF-financed sales.

A GAO report issued at the hearing [GAO/NSIAD-94-127] examined 48 sales to the four largest FMF recipients---Israel, Egypt, Turkey and Greece---over an unspecified time period. These contracts, valued at $11.6 billion and paid for with U.S. military aid, included offsets worth at least $4.7 billion, effectively increas- ing the assistance to $16.3 billion. The result, according to Rep. Cardiss Collins, Chair of the Commerce, Consumer Protection, and Competitiveness Subcommittee, is that "American taxpayers are actually paying to move defense-related production, and American jobs, to foreign countries."

GAO reported that no other arms exporter provides a combination of grant aid and offsets. Therefore, "it is unlikely U.S. contractors would lose sales to foreign competitors if they could not provide offsets in sales funded with U.S. grant aid." (One U.S. arms con- tractor suggested to GAO that "a prohibition on offsets may prompt FMF grant recipients to decide that they would rather use national funds" than take the U.S. aid. GAO politely dismissed this assertion as ridiculous.)

As such, GAO recommended that Congress consider amending the relevant laws "to prohibit the use of FMF grants [and possibly FMF concessional-rate loans] to pay for or request, require, obtain or provide offsets in connection with sales of U.S. military goods and services." This prohibition could be enforced, said GAO, by requir- ing U.S. contractors to certify that they will not provide offsets, and by requiring FMF recipients to certify, as a condition of the aid, that they will not seek offsets.

Some subcommittee members suggested that taxpayer-financed offsets should be permitted if they support overall U.S. foreign policy goals, such as aiding the Israeli defense industry. In response, GAO noted the current overcapacity in global arms production, and the loss of American jobs as the U.S. industry downsizes.

Offsets `Out-ed'

GAO's report notes that the "full extent to which foreign suppliers have actually displaced U.S. suppliers cannot be accurately measured because of the lack of data on the universe of offsets, previous and current suppliers, and other needed information."

To remedy this, Congress included an offset reporting requirement in the Defense Production Act Amendments of 1992. Signed into law (P.L. 102-558) in October of that year, the provision directs that any firm which makes an arms sale with offsets of $5 million or more must report those agreements to the Commerce Department. Using this aggregated data, Commerce must then report annually to Con- gress on the impact of offsets on U.S. industrial competitiveness, employment, and trade.

Nearly two years later, the reporting provision is not yet up and running, although in April the Commerce Department published proposed regulations to implement it . Commerce solicited comments on the rule and is expected to issue a final, implementing rule soon.

Both the law and the draft regulations make clear that the unaggre- gated offset data will not be made public, "unless authorized in writing by an official of the firm competent to make such an authorization." Although not specified, the report to Congress is expected to be public.

To get this info in a more timely manner, Sen. Russell Feingold introduced legislation last year---signed into law on 30 April 1994 (P.L. 103-236)---which requires that, at the time an arms sale is proposed, Congress be told whether offset agreements are included or envisioned in the deal (see ASM No. 22 p. 4). If offsets are included, the congressional foreign affairs committees may then request specific information on those agreements, permitting them to calculate a truer estimate of the sale's employment impact. This offset data will also be withheld from the public, as it is con- sidered proprietary.

The State Department is currently drafting regulations to implement this measure.

Legislative Alert
Arms Trade/Military Aid Issues to Be Resolved Soon in Conference

Congress is working briskly to finalize the Department of Defense and foreign aid budget bills, which contain a good deal of policy on arms trade and military aid. In the next ASM we will highlight the content of the final bills more thoroughly. Here we provide a summary of relevant policy which exists in either the House or Senate version of the bills and which will be dropped or maintained in a conference committee within the next few weeks.

FY 1995 Foreign Operations Appropriation Act

The House passed H.R.4426 on 25 May, and the Senate passed its amended version of the bill on 15 July. The following differences will be decided in House and Senate Foreign Operations subcommittee staff meetings being conducted now, and in conference committee before Congress recesses for the summer on 12 August.

Banning Military Training, Small Arms to Indonesia

The House Appropriations Subcommittee on Foreign Operations is "outraged" that the Clinton Administration skirted a Congres- sionally-imposed ban on military training for Indonesia last year by selling such training rather than providing it for free through the International Military Education and Training (IMET) program. "It was and is the intent of Congress to prohibit U.S. military training for Indonesia", the Committee wrote in its report on the bill. The House bill continues the ban on IMET, and specifically bars the use of any funds appropriated in the bill for processing sales of military training to Indonesia.

The Senate bill codifies a ban on transfers of light arms and crowd control items to Indonesia which has been U.S. policy since early January. The embargo will remain in place until the Secretary of State can report significant progress in the human rights situation in Indonesia and in East Timor, which Indonesia illegally annexed in 1977.

Arms Aid to Turkey Restricted over War on Kurds

The House withholds 25 percent of military aid to Turkey in FY 1995 until the Secretaries of State and Defense submit a report to Con- gress addressing "allegations of abuses against civilians by the Turkish armed forces and the situation in Cyprus". The House report on the bill expresses concern that the Turkish government has been using American-supplied weapons against civilians in its war with Kurdish guerrillas, and it expects the report to address this con- cern, as well.

The Senate bill requires only that arms transfer agreements to Tur- key stipulate that the weapons "will not be used in violation of international law".

Greek Aid Cut over Non-Adherence to Embargo

The House bill also withholds 25 percent of Greece's aid until the Secretary of State reports on Greece's alleged violations of the UN trade sanctions against Serbia. The Senate bill does not withhold money but does require a report describing how U.S. assistance to Greece "is promoting respect for principles and obligations under the United Nations sanctions against Serbia, the UN Charter and the Helsinki Accords."

Report on Thai Ties to the Khmer Rouge

The Senate bill directs the Secretary of State to report to Congress by 1 February 1995 on "the Thai military's support for the Khmer Rouge and the Thai Government's efforts to impede support for Burmese democracy advocates, exiles, and refugees." The Senate would also prohibit the provision of IMET to Thailand without prior notification and approval by the relevant committees.

Military Ties with Poland, Hungary, Czech Republic

Poland, Hungary and the Czech Republic, participants in NATO's "Partnership for Peace," are hoping to obtain full NATO membership soon. In the mean time, the Senate raises them to the status of "major non-NATO ally," making them eligible for participation in many NATO cooperative defense activities.

Specifically, the three would become eligible for free or cheap excess defense articles, and for leases and loans of major military equipment without prior Congressional notification. Further, they could work with NATO members on joint weapons research and development programs. The bill promotes increased arms transfers to the three, in order to promote standardization and interoperability of these countries' militaries with NATO forces.

New Military-to-Military Program Growing

A Military-to-Military Contact Program initiated in FY 1992 is, according to the Senate Armed Services Committee, "designed to encourage a democratic orientation of defense establishments and military forces of other countries." The program, seemingly very similar to the already existent "expanded IMET" program, was originally intended only for the new democracies in the Baltic region and in Eastern Europe. But the Administration is now seeking to greatly expand the program and extend it to other regions. The Administration requested $46.3 million in FY 1995, up from $10 mil- lion last year.

Both the House and Senate approved only $12 million. The House bill opposed expansion of the program to other regions, while the Senate earmarked $2.8 million of the $12 million for "activities in the area of responsibility of the U.S. Pacific Command."

FY 1995 National Defense Authorization Act

The House passed its version (H.R.4301) on 9 June, and the Senate passed its bill (S.2182) on 1 July. The following provisions will be decided in ongoing meetings of the House and Senate Armed Services Committee staff, and in the conference committee before 12 August.

Threat Assessment of U.S. Military Cooperation

The House bill includes a provision requiring the Pentagon to submit annually, along with its budget request, a description of, and justification for, any military cooperation activities (e.g., joint exercises, military assistance or training, arms transfers) proposed for the coming year.

Each report is to include information on how the proposed assistance is "intended to increase regional securi-ty", and an analysis of how a foreign country's forces could pose a threat "if they came under the control of a government hostile to United States interests".

Only activities proposed in the report would be permitted, unless the Secretary of Defense gives Congress 90 days notice before providing assistance or a reason why waiting 90 days would be injurious to U.S. security.

The measure also requires the Pentagon to "present alternative strategies for regional security based on mutual reductions in the size, spending, and capabilities of forces and on agreements among arms-supplying nations to join the United States in reducing or halting military cooperation activities".

U.S.-U.A.E. Joint Weapon Development

The Senate bill specifically prohibits cooperation with foreign governments on "the development of an advanced threat radar jammer for combat helicopters" until a comprehensive review of the program is completed. The measure is designed to stall a planned project with the United Arab Emirates. The review is to cover:

The "consistency of the program" with the DOD policy of prohibiting Foreign Military Sales until an operational test of the system is successfully completed and the item is approved for sale to a foreign government; "The potential for sensitive electronic warfare technology" to fall in to the hands of "potential adversaries"; Other "non-developmental items and less sophisticated technologies" that would fulfill the requirement; "A capability assessment of similar technologies available from other foreign countries and the consequences of proliferation of such technologies in regions of potential conflict."

RECENT U.S. EMBARGO ACTIONS

South African Embargo Lifted

On 25 May, fifteen days after Nelson Mandela's inauguration, the UN Security Council ended its ban on arms sales to South Africa. Within two weeks, the Commerce and State Departments had lifted the remaining restrictions on U.S. exports of weapons and dual-use equipment. (Fed. Reg. 15 June 1994; 20 June 1994; and 23 June 1994) On 27 June, President Clinton certified (as he must before U.S. firms or the government may sell arms) that "the furnishing of defense articles and services to the Government of South Africa will strengthen the security of the United States and promote world peace." (Federal Register 11 July 1994)

At the same time, the State Department gave notice on 30 June that it will generally deny arms export license applications to ARMSCOR, the arms marketing agency of the South African government, and to Denel Group, South Africa's largest arms manufacturer. This restriction was invoked due to a U.S. federal grand jury indictment of ARMSCOR in 1991 for violations of the Arms Export Control Act. (Federal Register 30 June 1994 p. 33811)

No Weapons to Rwanda

On 26 May, the White House issued Executive Order 12918, implement- ing an arms embargo on Rwanda which the UN had approved nine days prior. According to a notice in the Federal Register (2 June 1994 p. 28583), the U.S. government has unilaterally denied all weapons export requests since fighting broke out on 6 April, and the State Department has suspended all previously issued license approvals.

The Commerce Department---which controls items like military trucks, handcuffs, some ammunition, and machetes---is also affected by the embargo. (US Department of State Dispatch 6 June 1994 p. 379)

Non-lethal Arms to Peru

Soon after President Alberto Fujimori suspended Peru's constitution and dissolved Congress in April 1992, the United States halted all sales and transfers of arms. On 8 June 1994, the State Department announced that it would once again review, on a case-by-case basis, applications to export non-lethal defense articles and services to Peru. (Federal Register 23 June 1994 p. 32481)

DEALS IN THE WORKS

The Administration notified Congress of the following Foreign Military Sales (FMS), leases, excess defense article (EDA) trans- fers and export licenses for Direct Commercial Sales (DCS) from industry during May-June. Abbreviated information on sources is given. For fuller sources, contact our office.

(Sales table omitted)

RECENT GOVERNMENT PUBLICATIONS

Asian Aeronautics: Technology Acquisition Drives Industry Development [GAO/NSIAD-94-140], May 1994, 18 pp.

Developments in Cambodia (hearing before the Asia and Pacific Affairs Subcmte. of the House Foreign Affairs Cmte. on 27 October 1993), US GPO: 1994, 100 pp.

Developments in the Middle East, March 1994 (hearing before the Europe and the Middle East Subcmte. of the House Foreign Affairs Cmte. on 1 March 1994), US GPO: 1994, 71 pp.

Director of Naval Intelligence Posture Statement, Office of Naval Intelligence, 1994, 47 pp.

The Export Administration Act of 1994 (hearings before the International Finance and Monetary Policy Subcmte. of the Senate Banking, Housing, and Urban Affair Cmte. on 3 and 24 February 1994), US GPO: 1994, 216 pp.

Export Control and Nonproliferation Policy, U.S. Congress, Office of Technology Assessment, US GPO: 1994, 82 pp.

Export Controls: License Screening and Compliance Procedures Need Strengthening [GAO/NSIAD-94-178], June 1994, 50 pp.

Foreign Aid Reform (hearings before the International Economic Policy, Trade, Oceans and Environmental Affairs Subcmte. of the Senate Foreign Relations Cmte. on 9 and 22 February, and 3 March 1994), US GPO: 1994, 274 pp.

Foreign Military Sales, Foreign Military Construction Sales and Military Assistance Facts (as of 30 September 1993), Defense Security Assistance Agency, 1994, 115 pp.

Foreign Military Sales: Use of FMS in Proposed Commercial Sale of Airborne Self-Protection Jammer [GAO/NSIAD-94-202], June 1994, 14 pp.

Military Exports: Concerns Over Offsets Generated With U.S. Foreign Military Financing Program Funds [GAO/NSIAD-94-127], June 1994, 32 pp.

Peace Operations: Cost of DOD Operations in Somalia [GAO/ NSIAD-94- 88], March 1994, 54 pp.

Rewriting the Export Administration Act (hearing before the Economic Policy, Trade, and Environment Subcmte. of the House Foreign Affairs Cmte. on 18 November 1993), US GPO: 1994, 188 pp.

Role of U.S. Armed Forces in the Post-Cold War World (hearing before the Senate Foreign Relations Cmte., 10 Feb 1994), US GPO: 1994, 55 pp.

"Saudi Arabia: Restructuring Arms Payments to the United States," CRS Report for Congress [94-356F], Richard F. Grimmett, 25 April 1994, 4 pp.

Science, Technology, and American Diplomacy, 1994 (fifteenth report from the President to Congress, May 1994), US GPO: 1994, 809 pp. [Contains information on cooperative technology programs, including military programs.]

"United States Army School of the Americas: Background and Congressional Concerns," CRS Report for Congress [94-433F], Richard F. Grimmett, 19 May 1994, 6 pp.

U.S. Participation in United Nations Peacekeeping Activities (hearings before the International Security, International Organi- zations and Human Rights Subcmte. of the House Foreign Affairs Cmte. on 24 June, 21 September and 7 October 1993), US GPO: 1994, 136 pp.

U.S. Policy Toward Iraq 3 Years After the Gulf War (hearing before the Europe and the Middle East Subcmte. of the House Foreign Affairs Cmte., 23 February 1994), US GPO: 1994.

U.S. Policy Toward North Korea (hearing before the East Asian and Pacific Affairs Subcmte. of the Senate Foreign Relations Cmte., 3 March 1994), US GPO: 1994, 52 pp.


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