Warfare vs. Welfare: Subsidies to Weapons Exporters

Key Problems

  • Subsidies for arms exports cost American taxpayers $7.6 billion in 1995.
  • In recent years, taxpayers have borne an increasing share of cost of the arms trade.
  • American corporate interests, rather than diplomatic or security concerns, are playing a larger role in weapons export policies.

Political leaders say the budget must be balanced by the year 2002, and this requires making tough choices. But in the rush to pass tough spending cuts, Congress and the Clinton administration are avoiding making an obvious choice: welfare over warfare.

The 1996 welfare law (Personal Responsibility and Work Opportunity Act) cuts federal safety net programs by $51.6 billion over five years (1998-2002). President Clinton says he wants to restore $17 billion in welfare spending over this period. Even if Congress approves this plan, federal support for poor families will drop about $7 billion annually over the next five years.

The government is spending that much every year to help U.S. weapons manufacturers market their wares around the world—plying everything from excess ammunition rounds to high-tech fighter jets. The U.S. is the world’s leading arms exporter; and, in essence, U.S. taxpayers will be subsidizing the weapons industry’s overseas sales with the “savings” from welfare cuts. Despite the end of the cold war and the demise of a global enemy, the U.S. weapons industry continues to fuel arms races around the world. U.S. weapons under foreign control add to the perils faced by U.S. troops stationed or fighting abroad (see In Focus: Controlling U.S. Arms Sales).

The rationale for U.S. government support for weapons exports varies. Along with the defense industry lobby, the administration—which by law must approve all weapons transfers overseas—emphasizes the need to keep defense industry production lines moving to be able to supply U.S. forces in the event of an unexpected crisis. And with defense industry jobs in nearly every congressional district and military contractors channeling millions in campaign contributions to both parties, lawmakers remain reluctant to cut weapons industry subsidies.

Facing modest post-cold war reductions in military spending, the weapons industry has, for the most part, ducked the challenge of conversion to nonmilitary production (see In Focus: Defense Conversion) and looked increasingly to overseas weapons sales to bolster production lines and profit margins. This plan hasn’t worked: Runaway costs for military equipment have priced most of the world out of the market, and demand has declined.

As a result, U.S. taxpayers have underwritten a growing share of the costs of military exports. In 1993 the U.S. authorized foreign military sales valued at a record $36 billion, a level unprecedented even during the cold war. By 1995 the sales volume had fallen to $12.6 billion. But over the same period, federal subsidies for weapons exports actually rose slightly—from $7 billion to $7.6 billion per year.

Much fanfare surrounds supposedly lucrative overseas weapons sales and the defense industry jobs they preserve. Yet the terms of these deals can negate any potential positive economic impact. To the extent they are subsidized by the taxpayer, such sales amount to a transfer of funds from the U.S. treasury to the weapons industry.

To the extent they pay cash for U.S. arms, foreign governments often raise the money by exporting goods to the United States. The Office of Management and Budget estimates that for every 100 jobs preserved by weapons exports, 41 others are lost by U.S. firms that cannot compete with imports from foreigners trying to pay for their weapons.

In addition, U.S. firms at times agree to sweeten weapons deals by providing overseas customers with valuable technologies or subcontracting opportunities, or both. These “offset” agreements, often worth more than the weapons sale, can lead to American job losses in the defense, high-tech, and manufacturing industries.

Problems with Current U.S. Policy

Key Problems

  • The current push to sell advanced weapons—especially to developing countries—will increase subsidy costs in the near future.
  • Weapons exports erode the U.S. military’s technological advantage over the rest of the world, leading to greater taxpayer expense down the road.
  • Export of advanced weapons can increase the danger to U.S. troops overseas when weapons outlast friendships.
  • Subsidized weapons exports result from and contribute to the high costs the U.S. pays for military equipment.

Most government support for weapons sales takes the form of grants and guaranteed loans to foreign governments to buy U.S.-built weapons. A new $15 billion program approved by Congress in 1995 covers defense industry losses in export deals. Several other programs underwrite defaults or waive fees to exporters and overseas buyers. U.S. embassies worldwide help negotiate these deals, while U.S.-funded military expos and air shows promote the wares of weapons manufacturers to foreign buyers. In addition, giveaways of surplus military hardware, help hook foreign armies on U.S. equipment, paving the way for future sales. Currently, 6,500 full-time employees of the Commerce, State, and Defense departments work to promote and finance overseas military sales.

Subsidized weapons sales are just one part of an increasingly burdensome system of corporate welfare for the weapons industry. Escalating equipment costs argue for subsidized foreign sales. Foreign sales, in turn, induce funding for development of even more sophisticated and expensive weapons. A prime example is the current push to open foreign markets—including developing countries—to advanced tactical fighters like the F-15 and F-16 that have cost U.S. taxpayers $1.8 billion and $2.9 billion respectively to develop. Both models—which together form the backbone of U.S. air power—have been exported in quantity (and with government subsidies) to our allies in Europe, Asia, and the Middle East.

But in the process the U.S. has forfeited part of its military technological “edge” over the rest of the world. Pressure to regain this edge has led to new development programs like the “next generation” tactical fighter, the Lockheed Martin F-22. Developing the F-22, scheduled for initial production in 1998, has already cost taxpayers $16 billion.

The Air Force chief of staff has already suggested arranging foreign sales to help finance the plane’s production. But due to the prohibitive cost of each plane (currently estimated at $166 million), any overseas sale will cost taxpayers tens of millions in development, production, and export subsidies.

Furthermore, the F-22’s presence in foreign militaries would in all likelihood lead provoke yet another expensive “next generation” fighter program, costing taxpayers, once again, tens of billions of dollars.

Toward a New Foreign Policy

Key Recommendations

  • Vital services to the poor should be reinstated and financed through elimination of arms export subsidies.
  • Congress should approve the arms trade “Code of Conduct” legislation.
  • Congress should prohibit funding new military programs through overseas sales.

The 1996 welfare law, which drastically cut federal assistance to the poor, was billed as the kind of painful but necessary adjustment inevitably faced in the process of balancing the budget. But every such decision is really a choice between competing priorities. As the overall budget shrinks, every dollar preserved for arms export subsidies has to come out of some other program. Congress and the Clinton administration should cut subsidies to weapons exporters and restore funding to vital services for poor families. Steps should be immediately taken to halt the spread of sophisticated conventional weapons—particularly in developing countries—and the burden to the taxpayer that it presents. Necessary reforms include the following:

  • Congress should pass the arms trade “Code of Conduct” legislation, which would prohibit the transfer of U.S. weapons or military training to nondemocratic or repressive regimes.
  • “Offset” agreements, which send technologies and jobs overseas along with American weapons, should be prohibited in any transaction subsidized by American taxpayers. Recoupment fees should be reinstated and increased; taxpayers have sacrificed too much in the development of military technologies and equipment to simply give these things away.
  • Congress should quickly repeal the $15 billion Defense Export Loan Guarantee before this program is used to underwrite high-tech weapons transfers to developing countries. If customers default on these loans, U.S. taxpayers could end up holding the bag.
  • Congress should prohibit the funding of new military programs through overseas sales, and should ban unconditionally the export of the F-22. If the plane cannot be financed with Defense department funds, it should be terminated outright in favor of more affordable options.
  • The U.S. government should maintain its self-imposed policy of restraint on the sale of high-tech weapons to Latin America.
  • The Clinton administration should ensure that Economic Support Funds administered by the State Department are not used for military purposes.
Written by Jon Lottman, The Campaign for New Priorities.