Defense Trade Data (27-JAN-06, GAO-06-319R).			 
                                                                 
Defense trade impacts many issues of importance to the Department
of Defense (DOD), including maintaining a healthy supplier base, 
protecting critical technologies, ensuring access to a secure	 
supply of defense-related items and services, managing technology
transfers, and increasing interoperability with allies. A	 
critical element to guide decision makers is access to		 
comprehensive and reliable data. The Committee on Armed Services,
through its report on the National Defense Authorization Act for 
Fiscal Year 2006, directed GAO to identify and assess defense	 
trade data. In response, we (1) identified defense trade data	 
available from U.S. government sources and their limitations, and
(2) determined defense trade balances as indicated by the data	 
for years 2000 through 2004.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-319R					        
    ACCNO:   A45937						        
  TITLE:     Defense Trade Data 				      
     DATE:   01/27/2006 
  SUBJECT:   Data collection					 
	     Defense economic analysis				 
	     Foreign military sales				 
	     International trade				 
	     International trade regulation			 
	     Interoperability					 
	     Technology transfer				 

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GAO-06-319R

January 27, 2006

The Honorable John Warner

Chairman

The Honorable Carl Levin

Ranking Minority Member

Committee on Armed Services

United States Senate

Subject: Defense Trade Data

Defense trade impacts many issues of importance to the Department of
Defense (DOD), including maintaining a healthy supplier base, protecting
critical technologies, ensuring access to a secure supply of
defense-related items and services, managing technology transfers, and
increasing interoperability with allies. A critical element to guide
decision makers is access to comprehensive and reliable data. The
Committee, through its report on the National Defense Authorization Act
for Fiscal Year 2006, directed GAO to identify and assess defense trade
data. In response, we (1) identified defense trade data available from
U.S. government sources and their limitations, and (2) determined defense
trade balances as indicated by the data for years 2000 through 2004.

For this review, we defined defense trade as the buying and selling of
defense articles and services between the United States and foreign
entities. To identify data sources and limitations, we interviewed agency
officials of the Departments of Defense, State, Commerce (Census Bureau
and Bureau of Economic Analysis), and Homeland Security (Customs and
Border Protection) and reviewed past GAO and agency reports. To determine
defense trade balances, we analyzed data from the Departments of Defense,
Commerce, and State and considered their limitations. To assess data
reliability, we performed electronic testing of required data elements,
interviewed knowledgeable agency officials, and reviewed existing
information about the data system. In addition, where applicable, we
compared data to published data. Those data sets that we determined to be
sufficiently reliable indicators of defense trade were used to calculate
the defense trade balance for the years 2000 to 2004.

We performed our review from May 2005 to January 2006 in accordance with
generally accepted government auditing standards.

In brief, we found that several agencies collect data that can be used as
indicators of defense trade, such as the Census Bureau's data on U.S.
imports and exports and DOD's foreign military sales and prime contracts
data. While there are other related data sources, such as the State
Department's export licensing data, Bureau of Economic Analysis' defense
service data, and DOD's foreign subcontractor data, we found them to be of
limited use as defense trade indicators. However, data from Census and DOD
sources were sufficient to assess defense trade at an aggregate level.
Based on the data we analyzed from these agencies, we found that for each
of the years 2000 through 2004, the United States sold significantly more
defense articles and services to foreign entities than it bought from
them.

On November 1, 2005, we briefed the results of our study to your staff.
These results are included as an enclosure to this letter.

The Departments of Defense, Commerce, and State provided technical
comments to a draft of this letter and enclosure, which we have
incorporated as appropriate.

Should you or your staff have any questions concerning this report, please
contact me at (202) 512-4841. Copies of this report are also available on
GAO's Web site at www.gao.gov . Key contributors to this report were John
Neumann, Assistant Director; John Ting; Bradley Terry; and Mark Gribbin.

Adobe Systems

Ann Calvaresi-Barr

Director, Acquisition and Sourcing Management

Enclosure

BRIEFING TO SENATE COMMITTEE ON ARMED SERVICES

Defense Trade Data

Background

      Defense trade data provides national security decision makers with vital
      information on transfers of defense articles and services between the
      United States and foreign entities. These transfers are made through
      government-to-government programs such as the Foreign Military Sales (FMS)
      program, or directly by companies selling to foreign entities under an
      approved export license. In addition, DOD and U.S. companies purchase
      defense articles and services from foreign entities.

      Objectives

The Senate Armed Services Committee report on the National Defense
Authorization Act for FY 2006 directed GAO to identify and assess defense
trade data. In response, this briefing evaluates the following:

1. What defense trade data is available from U.S. government sources and
what are their limitations?

           2. What does the available data indicate about the U.S. defense
           trade balance from 2000 to 2004?

Summary

Several agencies collect data that can be used as indicators of defense
trade. The Department of Commerce collects data on U.S. imports and
exports. Additionally, DOD collects data on its own sales and purchases.
Data from these sources were sufficiently reliable to assess defense trade
at an aggregate level. Other related data on balance of payments, export
licenses, and foreign subcontractors were of limited use as indicators of
the level of defense trade.

The United States sells significantly more defense articles and services
to foreign entities than it buys. Between 2000 and 2004, U.S. defense
exports averaged $11.5 billion a year, versus imports of $1.8 billion a
year; DOD military sales averaged $12.6 billion a year, versus purchases
of $1.5 billion a year. During the same period, DOD purchases of defense
articles and services from foreign companies have decreased from 2.4
percent to 1.7 percent of all such DOD purchases.

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Data Available from Federal Agencies

DOD and the Departments of Commerce and State are the principal agencies
that collect data related to defense trade.

           o  The Department of Commerce's Census Bureau collects export and
           import data on actual shipments and deliveries of goods, which
           includes defense articles, as part of its U.S. foreign trade
           statistics. This data is mostly collected by the Department of
           Homeland Security's Customs and Border Protection at ports of
           entry and exit, which is then reported to Census. Separately,
           Commerce's Bureau of Economic Analysis (BEA) assembles estimates
           of imports and exports of a range of services as a part of its
           Balance of Payments Accounts.

           o  DOD collects data on contractual sales and purchases of defense
           articles and services through its FMS and prime contract data
           systems. FMS data include all defense articles and services sold
           by DOD to foreign governments, while prime contract data include
           DOD purchases from foreign entities. This data differs from
           Commerce import and export data as it reflects signed contracts
           for goods and services rather than actual deliveries. Another DOD
           office separately collects data from U.S. contractors on defense
           subcontracts performed overseas, based on certain dollar
           thresholds and reporting criteria.

           o  The State Department collects data on proposed direct
           commercial sales of defense articles and services by U.S.
           companies to foreign persons as part of its export licensing
           program. License data are based on the authorized value of export
           licenses and agreements. Export licenses authorize U.S. companies
           to sell defense articles and services directly to foreign persons.
           Agreements, such as manufacturing license agreements and technical
           assistance agreements, allow the transfers of technical knowledge,
           production rights or manufacturing know-how from U.S. companies to
           foreign persons.

Objective 1

What defense trade data is available from U.S. government sources and what
are their limitations?

Commerce Department Data Observations and Limitations

           o  Census data reflect the movement of goods crossing U.S.
           borders. Consequently, the data may count movements even when they
           do not result in changes of ownership. For example, if goods are
           temporarily exported to the manufacturer for repair or
           maintenance, they will be counted as exports even though no
           purchase or sale is being made. However, as these goods are likely
           to be imported back into the United States, these transfers do not
           significantly impact the data's usefulness in assessing defense
           trade.

           o  BEA service import and export data was limited for the purpose
           of assessing defense trade because it captures data that was
           outside our definition of defense services.

           BEA captures U.S. company exports of services under technical
           assistance agreements and manufacturing license agreements, but it
           does not separate them into defense and non-defense sectors. While
           BEA data include defense services associated with the FMS program,
           this information is not complete without data on defense services
           exported by U.S. companies.

           BEA's Direct Defense Expenditures account captures service import
           data that is outside our definition of defense services. This
           account primarily measures expenditures incurred abroad by U.S.
           military agencies, including wages for foreign nationals, foreign
           contractual services, and construction expenditures in support of
           military bases overseas.

Objective 1 (cont.)

Defense Department Data Observations and Limitations

           o  FMS data includes sales financed by U.S. government grants and
           loans to foreign countries. Grant-funded sales are the practical
           equivalent of sales from U.S. industry to U.S. government.1 

           o  Our analysis of the FMS data showed discrepancies in the value
           of some FMS agreements. According to a DOD official, one possible
           reason for the discrepancies is that amendments representing
           additional sales for some of the agreements were not entered into
           the data, thus underreporting sales. However, even if all the
           discrepancies result in underreporting of sales, they amounted to
           only 5 percent of total sales for the years 2000 through 2004 and,
           therefore, were not significant enough to impact the reliability
           of the data for determining the aggregate level of sales.

           o  DOD prime contract data defines a foreign contractor as a
           company that is not incorporated in the United States. Therefore,
           DOD does not consider purchases from a company that is
           incorporated in the United States but owned by a foreign parent
           company to be foreign.

           o  DOD foreign subcontractor data was not used in our analysis as
           it only captures a segment of foreign subcontracts and is of
           limited use as an indicator of aggregate defense trade. It does
           not capture:

-- Subcontracts beyond the second tier.

-- Subcontracts worth under $500,000.

-- Subcontracts where under $100,000 of work is performed abroad.

-- Subcontracts let under prime contracts where (1) the

principal place of performance is abroad; and (2) foreign place of
performance is indicated in the contractor's offer.2

In addition, GAO has previously identified contractor compliance problems
with the requirement to report foreign subcontracts to DOD
(GAO/NSIAD-99-8; GAO-04-381). While DOD has taken actions to address this
issue, such as sending letters to the top 100 defense contractors to
remind them of the reporting requirement, we have not evaluated whether
these actions have improved contractor compliance.

Objective 1 (cont.)

1 FMS data includes equipment paid for by U.S. military grants. From
fiscal years 2000-2004, U.S. military grants to foreign governments
averaged $4.5 billion per year.

2 DOD contracts where the principal place of performance is abroad can be
identified through DOD's DD-350 database.

State Department Data Observations and Limitations

           o  State Department license data does not represent actual orders
           placed or deliveries3 made by companies, only the amounts they are
           authorized to export. Therefore, license values cannot be used to
           quantify the actual value of trade and were not used in our
           analysis of defense trade.4

           o  State Department license data also has reliability issues.

           Previous GAO work noted that the State Department data
           double-counts the value of export licenses stemming from
           manufacturing license and technical assistance agreements
           (GAO-05-156R).

           License values given in the State Department's licensing database
           include the values of terminated agreements.

Objective 1 (cont.)

3 On October 18, 2003, use of the Automated Export System (operated by
Census and the Bureau of Customs and Border Protection) by exporters
became mandatory for all shipments of State Department controlled
hardware. After some data problems are resolved, State Department data
could become useful for our analysis.

4 Data on actual exports of goods resulting from export licenses is
captured in the Census data used in our analysis.

Defense Trade Balance: U.S. Exports versus Imports5

Based on our analysis of Census data, U.S. defense exports averaged $11.5
billion a year, versus imports of $1.8 billion a year. U.S. exports of
defense articles ranged from $10.7 to $11.9 billion while imports ranged
from $1.5 to $2.1 billion.

      Source: GAO analysis of U.S. Census Bureau data.

Another measure of the defense trade balance shows that imports averaged
only 15 percent of exports during the period 2000-2004.

                                                Imports as 
Calendar   Defense exports   Defense imports     %      
     year       (billions)        (billions)               2000 $10.7 $1.5 14 
                                                of exports                 
     2001          11.6               1.6           14     
     2002          11.8               1.9           16     
     2003          11.6               1.7           15     
     2004          11.9               2.1           18     

      Source: GAO analysis of U.S. Census Bureau data.

Objective 2

What does the available data indicate about the U.S. defense trade balance
from 2000 to 2004?

5 Data are all in nominal values, unadjusted for inflation. Data represent
actual deliveries and shipments of defense articles for calendar years
2000-2004. As noted on page 5, BEA service trade data was not used in our
analysis because it did not allow us to present defense service data in
accordance with our definition.

Defense Trade Balance: D DOD Sales versus Purchases6

Based on our analysis of DOD sales and purchase contract data, FMS
averaged $12.6 billion7 a year, versus foreign military purchases of $1.5
billion a year. FMS ranged from $11.1 to $13.8 billion between 2000 and
2004, while foreign military purchases ranged from $0.9 to $2.0 billion.

      Source: GAO analysis of DOD's FMS and prime contract data.

Another measure of the defense trade balance shows that purchases averaged
only 12 percent of sales during the period 2000-2004.

                     DOD Foreign                           
Fiscal  DOD FMS    Military     DOD Foreign Military    
    year  (billions)  Purchases    Purchases as % of FMS   2000 $11.1 $1.7 15 
                     (billions)                                            
    2001     12.8        0.9                 7             
    2002     12.2        1.6                13             
    2003     12.9        1.4                11             
    2004     13.8        2.0                14             

      Source: GAO analysis of DOD's FMS and prime contract data.

Objective 2 (cont.)

6 Data are all in nominal values, unadjusted for inflation. Data represent
DOD's contractual obligations for sales and purchases of defense articles
and services for fiscal years 2000-2004, not actual shipments or
deliveries. As deliveries and shipments are not necessarily completed in
the same year that a contract is made, DOD sale and purchase data are not
directly comparable to the Census export and import data presented in the
preceding section.

7 Total U.S. military sales is likely higher because, as stated on page 7,
we did not include State Department's licensing values in our analysis of
defense trade.

Additional Observation8

Based on our analysis of DOD's prime contract data, the percentage of DOD
purchases of defense articles and services from foreign companies as
compared to all DOD purchases of defense articles and services, decreased
from 2.4 percent in fiscal year 2000 to 1.7 percent in 2004.

      Source: GAO analysis of DOD's prime contract data.

Fiscal Year DOD Foreign Military DOD Foreign Military Purchases as a % of  
               Purchases (billions)          All Military Purchases           
      2000             $1.7                            2.4                    
      2001             0.9                             1.2                    
      2002             1.6                             1.8                    
      2003             1.4                             1.4                    
      2004             2.0                             1.7                    

      Source: GAO analysis of DOD's prime contract data.

8 Data presented in this section are all in nominal values, unadjusted for
inflation.

(120420)
*** End of document. ***