Financing the Arms Trade

Abstract

When a government acquires a product from foreign sources, some financial transaction must occur. Countries may pay cash, borrow funds to pay for the goods over time, provide other goods in return, or receive the goods on a grant basis. With respect to commercial goods, such as aircraft, power generation equipment, and telecommunications products, methods of financing are well known, and an international framework disciplining such practices has gradually been established. Financing involving the defense trade is much more opaque, however, and there are no international agreements governing such transactions. With the end of the Cold War, and the sharp decline in military assistance formally available from the superpowers, the issue of how arms sales are financed will become more important for purchasers and vendors. This article will review the means by which arms sales have been and are financed and will discuss the possibility of increasing information and international discipline on financing practices.

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References

See also ibid. for previous fiscal years. These documents contain individual-country summaries of the program and objectives.

2. U.S., Arms Control and Disarmament Agency , World Military Expenditures and Arms Transfers: 1991-92, March 1993. See also previous volumes in this series.

3. Ibid.

4. U.S., Congress, House , Conference Report 103-267, 103d Cong., 1st sess., 28 Sept. 1993, p. 27.

5. Edward J. Laurance and Herbert Wulf , An Evaluation of the First Year of Reporting to the United Nations Register of Conventional Arms (Monterey, CA: Monterey Institute of International Studies, 1993).

6. Export-Import Bank , Ex-Im Bank: Jobs through Exports, Ex-Im Bank annual report, 1993.

7. U.S., Office of Management and Budget , Financing Defense Exports (November 1990), 11 Dec. 1990.

8. Export-Import Bank Act of 1945, as amended, sec. (2) (b) (6).

Ernest Graves , U.S. Security Assistance in the 1980's (Washington, DC: Center for Strategic and International Studies, 1983).

10.

10. House , Conference Report 103-267, p. 27.

11.

11. In the past, guarantee programs needed only to be authorized, but no budget authority was required. Under the Budget Enforcement Act of 1990, guarantee programs now require budget authority to cover the “subsidy element” of the guarantee. Basically, the subsidy element for guarantees covers the risk element that the government will actually have to provide funds to cover defaulted loans. As the loan guarantee program passed by the Congress covered only NATO countries plus Japan, Australia, Israel, and Korea, the risk element was deemed low by the government, and the subsidy element was thus calculated at $25 million.

12.

12. Aviation Week & Space Technology, 8 Feb. 1993, p. 27.

13.

13. Ibid., 5 July 1993, pp. 24-25.

14.

idem , Offsets in Military Exports, Dec. 1988.

15.

15. Letter from Lieutenant General Teddy Allen, director, Defense Security Assistance Agency, Department of Defense, to Don Fuqua, president, Aerospace Industries Association, 8 June 1993; letter from Lieutenant General Thomas Rhame, director, Defense Security Assistance Agency, to Joel Johnson, vice president, international, Aerospace Industries Association, 3 Dec. 1993. The change in policy relates to several DoD audits that uncovered irregularities in some such contracts.

16.

16. U.S., Department of Defense, Defense Security Assistance Agency, Comptroller, Foreign Military Sales Control and Reports Division, Foreign Military Sales, Foreign Military Construction Sales and Military Assistance Facts as of September 30, 1992, n.d.

17.

17. Organization for Economic Cooperation and Development , Arrangements on Guidelines for Officially Supported Export Credits, OCDE/GD (92) 95 (Paris: Organization for Economic Cooperation and Development, 1992). Under the arrangement, all countries are grouped into three categories based on per capita income. Categories I, II, and III basically comprise industrial countries, upper-and middle-income developing countries, and poorer developing countries, respectively. For the first two categories, export credit agencies are not to subsidize interest rates below the market-based rate agreed for their currency by arrangement members. Loans are usually not to cover more than 85 percent of the cost of the total transaction. For the poorer countries, some subsidization is allowed in the interest rates for high-interest-rate currencies. The arrangement includes understandings for specific sectors, including one known as the Large Aircraft Sector Understanding. Among other provisions, this understanding allows loans and guarantees for industrial countries for up to 12 years, whereas the longest standard term in the arrangement is for 10 years. This recognizes that civil aircraft tend to be in inventory for a longer period of time than other capital goods. An arrangement that included defense equipment might similarly recognize the longer life span of major weapons platforms such as aircraft and ships.