Military Exports: A Comparison of Government Support in the United States
and Three Major Competitors (Letter Report, 05/18/95, GAO/NSIAD-95-86).

GAO reviewed the global defense export market, focusing on the United
States' and three major foreign competitors' efforts to enhance the
competitiveness of their defense exports.

GAO found that: (1) the United States has been the leading defense
exporter since 1990, and will likely remain strong in the world market
based on the level of orders placed but not yet filled; (2) U.S. growth
in the export market will be limited by U.S. national security and
export control policies; (3) the cost and availability of follow-on
support and training, price, financing, and offset arrangements
influence the outcome of a defense sale; (4) government support to
increase foreign sales may become more significant as global defense
markets decrease and competition for market share increases; (5)
although all four of the countries reviewed generally provide comparable
types of assistance to their defense exporters, the extent and structure
of such assistance varies; and (6) all three European countries provide
government-backed guarantees for both non-defense and defense exports,
while the United States provides grant funding for purchases of U.S.
defense articles and services.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-95-86
     TITLE:  Military Exports: A Comparison of Government Support in the 
             United States and Three Major Competitors
      DATE:  05/18/95
   SUBJECT:  International economic relations
             Foreign military sales
             Defense industry
             Foreign military sales policies
             Foreign loans
             Military materiel
             Foreign financial assistance
             Exporting
             Competition
IDENTIFIER:  France
             Germany
             United Kingdom
             Security Assistance Program
             DOD Foreign Military Financing Program
             Foreign Military Sales Program
             
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Cover
================================================================ COVER


Report to Congressional Committees

May 1995

MILITARY EXPORTS - A COMPARISON OF
GOVERNMENT SUPPORT IN THE UNITED
STATES AND THREE MAJOR COMPETITORS

GAO/NSIAD-95-86

Military Exports


Abbreviations
=============================================================== ABBREV

  CRS - Congressional Research Service
  DCI - Dï¿½fense Conseil International
  DESO - Defense Export Services Organisation
  DOD - Department of Defense
  DRI - Delegation for International Relations
  ECGD - Export Credits Guarantee Department
  FMF - Foreign Military Financing
  FMS - Foreign Military Sales
  OMB - Office of Management and Budget
  OTA - Office of Technology Assessment

Letter
=============================================================== LETTER


B-260186

May 18, 1995

Congressional Committees

Declining U.S.  defense spending has placed defense-related jobs and
some domestic industrial capabilities at risk.  U.S.  defense
companies are using a variety of strategies to adjust to the decline. 
One such strategy is to increase defense export sales.  Export
proponents point out that such sales maintain industrial base
capabilities and lower the cost of weapons to the U.S.  government. 
Proponents also argue that more government support for exports is
needed to level the playing field against foreign (mostly European)
competitors.  Opponents of providing additional U.S.  government
support argue that such support could delay restructuring of the
defense industry and jeopardize longer-term national security by
increasing global weapons proliferation. 

Because of the continuing congressional debate on how much support to
provide to defense exporters, we reviewed (1) conditions in the
global defense export market and (2) the tools used by France,
Germany, the United Kingdom, and the United States to enhance the
competitiveness of their defense exports.  Specifically, we compared
the U.S.  position in the global defense market relative to its major
competitors and analyzed the various factors that can contribute to a
sale, including export financing and other types of government
support.  We are providing this report to committees for their use in
debating these issues. 


   BACKGROUND
------------------------------------------------------------ Letter :1

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.\1 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.\2 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. 


--------------------
\1 Defense exports refer to major weapon systems end items such as
tanks, artillery, combat and transport aircraft, and missiles.  Data
is based on value of sales. 

\2 All dollar figures in this report are expressed in 1993 constant
dollars.  The last year data for all four countries was available was
1993. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

The United States has been the world's leading defense exporter since
1990; by 1993 its market share had increased to 49 percent of the
global market.  The increased U.S.  market share occurred during a
period of worldwide decreases in total defense exports.  The three
European countries we reviewed had in 1993 a combined global market
share of about 32 percent of total defense exports, which also
increased since 1990.  In the short term, at least, the United States
will likely remain strong in the world market, based on the level of
orders placed but not yet filled.  However, further growth in its
market share will be limited by a number of factors, including U.S. 
national security and export control policies to reduce dangerous or
destabilizing arms transfers to certain countries and certain major
foreign country buyers' practices of diversifying weapons purchases
among multiple suppliers. 

Government involvement in the defense industry's sales affects the
position of defense manufacturers in overseas markets.  However,
various other factors also influence the outcome of a defense sale. 
These factors include technical sophistication and performance of the
equipment, the cost and availability of follow-on support and
training, price, financing, and offset arrangements.\3 It should be
noted that government policies and programs can also affect these
other factors.  Government support targeted to increase overseas
sales may become more significant as global defense markets decrease
and companies fight to maintain market share.  However, because each
sale has its own unique set of circumstances, it is not possible to
quantify or rank the contribution of any one factor across the board. 

The U.S.  government has long recognized the positive impact that
defense exports can have on the defense industrial base.  In 1990,
the Secretary of State directed overseas missions to support the
marketing efforts of U.S.  defense companies as in all other areas of
commercial activity. 

Governments in France, Germany, the United Kingdom, and the United
States generally provide comparable types of support.  These include
(1) government-backed or -provided export financing, (2) advocacy on
behalf of defense companies by high-level government officials, and
(3) organizational entities that promote defense exports. 

Although all four countries generally provide comparable types of
assistance to their defense exporters in these areas, the extent and
structure of such assistance varies.  In particular, central
organizations support defense exports in France and the United
Kingdom, while in the United States several government agencies share
in supporting defense exports.  In addition, all three European
countries provide government-backed guarantees for commercial bank
loans; in the United States, financing is provided primarily through
the Foreign Military Financing (FMF) program in the form of grants
and loans and available only to a small group of countries.\4 In
fiscal year 1994, about 79 percent of U.S.  government financing was
in the form of grants.  With the exception of annually specified
amounts, which Congress mandates for financing purchases in Israel,
FMF generally is available only to finance purchases of U.S.  defense
articles and services.  Accordingly, providing grant funding for
purchases in the United States generally eliminates the competition
from other countries for those exports. 


--------------------
\3 The term "offsets" is used to cover a variety of arrangements by
which sellers direct new or additional purchases to the industry of
the buying nation as part of the sale agreement.  Direct offsets are
directly related to the product delivered to the customer, such as
producing a component of the system in question.  Indirect offsets
consist of the purchase of unrelated products or services. 

\4 Grants represent assistance for which the United States receives
no dollar reimbursement.  Loans generally refer to direct loans or
repayable foreign military sales credits that are made at either
market or concessional rates. 


   IN THE SHORT TERM, THE UNITED
   STATES IS LIKELY TO REMAIN
   STRONG IN THE WORLD MARKET, BUT
   FURTHER GROWTH WILL BE LIMITED
------------------------------------------------------------ Letter :3

While the global defense export market has declined since the late
1980s, the United States has become the world's leading defense
exporter.\5 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.\6 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.\7 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. 

   Figure 1:  1990 Global Arms
   Deliveries, by Supplier

   (See figure in printed
   edition.)

*Includes all other European countries, except France, Germany, and
the United Kingdom. 

   Figure 2:  1993 Global Arms
   Deliveries, by Supplier

   (See figure in printed
   edition.)

*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. 

   Figure 3:  Defense Orders,
   1990-1993

   (See figure in printed
   edition.)

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. 


--------------------
\5 The market share of all four countries of our review changed
following release of more current data on French defense exports. 
Previous data on French defense exports, in terms of deliveries, for
1993 was $600 million.  Current data on French defense exports
released by the U.S.  government shows an increase to $3.7 billion in
1993.  As a result of the increase of French defense exports in 1993,
the U.S.  market share for 1993 decreased from 55 percent to 49
percent. 

\6 Data for U.S.  defense export deliveries includes exports sold
commercially and through the foreign military sales program. 

\7 All data for years prior to 1992 represent transactions of the
Soviet Union as a whole.  Of the former Soviet Republics, Russia was
the principal arms producer and exporter.  Therefore, 1992 and 1993
data reflect only Russian sales. 


   NUMEROUS FACTORS CONTRIBUTE TO
   SUCCESSFUL DEFENSE EXPORT SALES
------------------------------------------------------------ Letter :4

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.\8 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. 


--------------------
\8 Financing Defense Exports (Office of Management and Budget, Nov. 
1990); Global Arms Trade:  Commerce in Advanced Military Technology
and Weapons (Office of Technology Assessment, June 1991); and The
U.S.  Export-Import Bank:  Review of a Proposal to Finance Military
Exports (GAO/T-NSIAD-91-16, May 2, 1991). 


      U.S.  AND EUROPEAN OFFICIALS
      CITE NUMEROUS FACTORS
      IMPORTANT TO DEFENSE EXPORT
      SALES
---------------------------------------------------------- Letter :4.1

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. 


   GOVERNMENTS GENERALLY PROVIDE
   THE SAME TYPES OF ASSISTANCE TO
   DEFENSE EXPORTERS
------------------------------------------------------------ Letter :5

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. 


      GOVERNMENT-BACKED
      OR -PROVIDED EXPORT
      FINANCING
---------------------------------------------------------- Letter :5.1

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,\9 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.  In fiscal
year 1994 the United States used the program to provide about $3.1
billion in grants, mostly to Israel and Egypt, and $0.8 billion in
loans to Greece, Turkey, and Portugal.  Applicable U.S.  legislation
provides that FMF grants are generally intended to fund purchases of
U.S.  military goods and related services.  It is unlikely U.S. 
contractors would lose sales to foreign competitors for FMF
grant-funded purchases.\10

The U.S.  government is fully funding the purchase of U.S.  military
goods and services by other countries, thus giving U.S.  companies an
advantage over foreign competitors that are only offering government
guarantees on loans.  In addition, in fiscal year 1994, the Defense
Security Assistance Agency waived about $273 million in research and
development costs on foreign military sales to nine allied countries. 

U.S.  commercial banks provide some financing of defense exports;
however, the U.S.  government does not guarantee such financing.  The
Export-Import Bank of the United States is prohibited from providing
loans or guarantees for purchasing defense articles or services
unless requested to do so by the President.\11 Limited export
financing is also provided at the state level.  For example, from
July 1988 to November 1994 the state of California provided about $26
million in loan guarantees to California-based defense companies. 


--------------------
\9 The fiscal year in the United Kingdom is from April 1 of one year
to March 31 of the following year. 

\10 See Military Exports:  Concerns Over Offsets Generated With U.S. 
Foreign Military Financing Program Funds (GAO/NSIAD-94-127, June 22,
1994). 

\11 Recent legislation (P.L.  103-428-Oct.  31, 1994) allows the
Export-Import Bank to provide financing on its own initiative,
subject to certain conditions, for the export of nonlethal defense
articles and services when the primary end use will be for civilian
purposes.  The new law provides an exception to the previous
prohibition on the Bank financing of exports of any defense articles
and services, but only in those cases where the article to be
exported is both nonlethal and the primary end use is for civilian
purposes, for example, radar for air traffic control systems. 


      ADVOCACY ON BEHALF OF
      DEFENSE COMPANIES
---------------------------------------------------------- Letter :5.2

The French and U.K.  governments have historically sent high-level
government officials, such as ministers of defense, ambassadors, or
prime ministers, to persuade foreign buyers to buy their national
defense products.  The German government has generally avoided using
high-level government officials to promote defense exports, in part
because defense exports are a politically sensitive issue in Germany. 
In the United States, defense exports have traditionally been
approved to further U.S.  national security and foreign policy goals. 
Nevertheless, as part of the U.S.  government's emphasis on overall
export promotion efforts, high-ranking U.S.  officials have been
increasingly willing to intervene to influence competitions in favor
of U.S.  defense companies.  However, DOD policy indicates that U.S. 
officials should support the marketing efforts of U.S.  companies but
maintain strict neutrality between U.S.  competitors. 

During the competition for the United Kingdom's Skynet-4 Satellite
launch vehicle, U.S.  government officials intervened at a high level
on behalf of U.S.  defense exporters.  According to an industry
representative involved in this sale, the U.K.  Ministry of Defence
split the contract between the U.S.  company and the French as a
result of intervention by the U.S.  Ambassador and the Secretary of
Commerce.  The official stated that without U.S.  government
involvement, the French manufacturer would have received the entire
$1-billion contract. 


      ORGANIZATIONS THAT SUPPORT
      DEFENSE EXPORTS
---------------------------------------------------------- Letter :5.3

France and the United Kingdom each have a single organization within
their respective defense ministries with responsibility for
identifying defense export opportunities abroad, promoting and
facilitating defense exports, providing assistance with defense
equipment demonstrations and trade shows, and providing advice to
industry regarding offsets.  In France this organization is known as
the Delegation for International Relations.  In the United Kingdom
this organization is known as the Defence Export Services
Organisation.  Although Germany does not have a defense ministry
organization comparable to that of France or the United Kingdom,
German companies involved in cross-border collaborative efforts with
those countries are able to benefit indirectly from the export
promotion activities of the French and U.K.  organizations.  While
the United States has no centralized government organization with a
comparable export promotion role, the Departments of Defense,
Commerce, and State each provide similar support for U.S.  defense
exports. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :6

The Departments of Commerce, Defense, and State were given the
opportunity to comment on a draft of this report.  Defense concurred
with the report.  Commerce wrote that it had reviewed the draft
report and did not have any comments.  State, in general, agreed with
our analysis and conclusions and found the draft report to be an
accurate reflection of the international competition for military
export contracts. 

State also commented that offsets play a major role in determining
which firms obtain contracts and foreign governments are eager to
support offset arrangements to obtain a competitive advantage.  In
addition, State noted that sales of conventional arms are a
legitimate instrument of U.S.  foreign policy deserving U.S. 
government support when they help friends and allies deter
aggression, promote regional stability, and increase interoperability
of U.S.  and allied forces.  However, State pointed out that an
examination of the dynamics of regional power balances and the
potential for destabilizing changes in the region is required for
each specific sale. 

We have made minor factual revisions to the report where appropriate
based on technical comments provided by Defense and State. 

We did our work between January 1994 and February 1995 in accordance
with generally accepted government auditing standards.  A discussion
of our scope and methodology is in appendix I.  More information on
government support to enhance the competitiveness of defense products
is provided in appendix II.  The comments of the Departments of
Defense, State, and Commerce are presented in appendixes III, IV, and
V, respectively. 


---------------------------------------------------------- Letter :6.1

We are sending copies of this report to the Secretaries of Defense,
Commerce, and State and the appropriate congressional committees. 
Copies will also be available to other interested parties on request. 

Please contact me at (202) 512-4587 if you or your staff have any
questions concerning this report.  Other major contributors to this
report are listed in appendix VI. 

David E.  Cooper
Director, Acquisition Policy, Technology,
 and Competitiveness Issues

List of Committees

The Honorable Mark O.  Hatfield
Chairman
The Honorable Robert C.  Byrd
Ranking Minority Member
Committee on Appropriations
United States Senate

The Honorable Strom Thurmond
Chairman
The Honorable Sam Nunn
Ranking Minority Member
Committee on Armed Services
United States Senate

The Honorable Jesse Helms
Chairman
The Honorable Claiborne Pell
Ranking Minority Member
Committee on Foreign Relations
United States Senate

The Honorable Bob Livingston
Chairman
The Honorable David Obey
Ranking Minority Member
Committee on Appropriations
House of Representatives

The Honorable Floyd Spence
Chairman
The Honorable Ronald V.  Dellums
Ranking Minority Member
Committee on National Security
House of Representatives

The Honorable Benjamin A.  Gilman
Chairman
The Honorable Lee Hamilton
Ranking Minority Member
Committee on International Relations
House of Representatives


SCOPE AND METHODOLOGY
=========================================================== Appendix I

Because of the continuing debate on how much support to provide to
defense exporters, we reviewed conditions in the global defense
export market and the tools used by France, Germany, the United
Kingdom, and the United States to enhance the competitiveness of
their defense exports.  Specifically, we compared the U.S.  position
in the global defense market relative to its major competitors and
analyzed the various factors that can contribute to a sale, including
export financing and other types of government support. 

For our review, we selected France, Germany, and the United Kingdom
because they (1) represent the major competitors to U.S.  defense
exporters in terms of the value of exports sold and (2) sell to
approximately the same buyers.  In 1993 these four countries
represented 81 percent of the world's total defense market. 
Together, Russia and China represented 13 percent of the total
market, but were not part of this review because a large share of
Russian and Chinese defense products are sold to countries to which
the United States would not sell. 

While several U.S.  government agencies collect information on
defense exports, it is difficult to compare their analyses because
each agency uses different methodologies for collecting and reporting
the data.  We used mostly Congressional Research Service (CRS) data
on defense exports for calendar years 1990 to 1993 to compare the
U.S.  position in the global defense market relative to its European
competitors.  We also used more current data on French defense
exports, in terms of deliveries, provided by the U.S.  government. 
This new data increased the level of French defense exports, both in
absolute and relative terms, previously reported by CRS.  Further, we
use calendar year data rather than fiscal year data because data on
European defense exports is reported on a calendar year basis.  We
did not independently verify CRS data, but the data is generally
accepted among government agencies as dependable.  In addition, we
used the State Department's Office of Defense Trade Controls data on
deliveries of U.S.  direct commercial sales, because CRS does not
include that data in its annual reports on global arms sales. 

To determine the U.S.  position in the global defense market in the
near future, we used the value of U.S.  defense orders as reported by
CRS.  However, the value of these orders includes only those placed
through the Foreign Military Sales program and does not include
orders placed by direct commercial means.  While the State Department
reports the value of export licenses approved for direct commercial
sales, it does not report the value of actual defense orders placed
as a result of those licenses.  The value of direct commercial sales
deliveries as a result of those licenses, according to government
documents, may be as little as 40 to 60 percent of the value
originally reported when the license was approved.  The State
Department reported that it issued about $87 billion in licenses from
fiscal year 1990 to 1993. 

In analyzing the various factors that contributed to winning a
defense sale, we held discussions with U.S.  government and defense
company officials responsible for tracking U.S.  defense sales.  In
addition, we reviewed prior government reports on the subject. 

To obtain information on U.S.  defense export promotion efforts, we
reviewed numerous government and nongovernment studies and reports on
the subject.  In addition, we interviewed officials at the
Departments of Defense, Commerce, and State, and the Defense Security
Assistance Agency; U.S.  defense company officials located in the
United States and Europe; and trade organizations.  We also spoke to
officials from the Office of Management and Budget, the Export-Import
Bank, the Banker's Association for Foreign Trade, and six commercial
banks, to obtain additional information on defense export financing. 

To obtain information on European countries' export promotion
programs, we discussed with, and analyzed documents from, officials
involved in their countries' defense export promotion activities. 
This group included officials from national governments, academia,
and European defense companies.  We also met with officials from the
Department of Defense's Office of Defense Cooperation and the
Department of Commerce's U.S.  and Foreign Commercial Service
offices.  We also attended the Eurosatory Land Show in Paris, France,
to observe U.S.  exporters and their competitors at a major defense
trade show. 

To convert French francs and British pounds to U.S.  dollars, we used
the following exchange rates.  To report on France's Delegation for
International Relations annual budget, we used the average calendar
year 1994 exchange rate.  To report on the U.K.'s Defence Export
Services Organisation annual budget and the amount of defense export
financing provided by the Export Credits Guarantee Department, we
used the exchange rate at the end of the U.K.  fiscal years ending
March 31, 1993, and March 31, 1994. 

We sought to report on multilateral agreements on defense trade and
found that no such agreements exist. 


TYPES OF GOVERNMENT ASSISTANCE
========================================================== Appendix II


   DEFENSE EXPORT FINANCING
-------------------------------------------------------- Appendix II:1

Approaches to financing defense exports vary among the four
countries.  Such financing includes the use of various financial
instruments, including grants, loans, and guarantees. 


      U.S.  DEFENSE EXPORT
      FINANCING PRIMARILY PROVIDED
      THROUGH THE FOREIGN MILITARY
      FINANCING PROGRAM
------------------------------------------------------ Appendix II:1.1

In the United States, most financing is provided through the
government's Foreign Military Financing (FMF) program, with limited
financing provided by commercial banks.  Some financing is also
available at the state level.  A 1992 decision to cancel fees on some
sales that recovered part of the government's investment in a weapon
system was made to increase the competitiveness of U.S.  firms. 

In fiscal year 1994 the United States used the FMF program to provide
about $3.1 billion in grants--mostly to Israel and Egypt--and $0.8
billion in loans to Greece, Turkey, and Portugal.  The FMF program
enables U.S.  allies to buy U.S.  defense goods and related services
and training.  Congress often specifies the extent of assistance to
certain countries.  Most grants and loans are used to purchase U.S. 
defense products, although a designated amount of FMF funding is
permitted to be spent on procurement in Israel.  In fiscal year 1994
Israel was permitted to spend at least $475 million of its grant
assistance on procurement in Israel.  The FMF program has decreased
since 1990, when the program provided over $4.8 billion in loans and
grants. 

The U.S.  government does not guarantee commercial financing for
defense exports.  Further, the Export-Import Bank of the United
States is prohibited from providing loans or guarantees for
purchasing defense equipment.  Therefore, according to U.S.  bank
officials, U.S.  commercial banks provide few financial services for
defense exports, partly because of concerns that such services might
generate negative publicity.  Senior bank managers approve defense
export financing transactions on a case-by-case basis.  Financing is
provided for defense transactions that are low risk and will carry a
short repayment schedule.  According to bank officials, repayment
terms of commercial loans for defense exports generally do not exceed
2 years.  These officials further stated that commercial banks are
reluctant to provide financing to foreign countries without some type
of U.S.  government guarantee program.  Moreover, even with such a
program, some banks would still be reluctant to provide financing to
defense exports, because of concerns about negative publicity. 

Some export financing is provided at the state level.  For example,
the state of California provides export financing for its defense
companies.  From July 1988 through November 1994 California provided
about $26 million in loan guarantees for 77 transactions to
California-based defense companies.  At the time of this review, 30
states provided export financing.  However, data on export financing
is not separated out by defense and nondefense exports; therefore, we
were not able to determine how many states, other than California,
provided financing for defense exports. 

For years the price of U.S.  military exports generally included a
Department of Defense (DOD) charge to recover a portion of its
non-recurring research and development costs.  In 1992 the policy of
recovering these costs when the sales were directly between the U.S. 
contractor and a foreign government was canceled.  The recovery of
U.S.  government costs were canceled in an effort to increase the
competitiveness of U.S.  firms in the world market.  In addition, the
Arms Export Control Act, which generally requires recovery of such
costs on government to government sales, permits DOD to waive or
reduce such charges on sales to North Atlantic Treaty Organization
countries, Australia, New Zealand, and Japan in furtherance of
standardization and mutual defense treaties.  In fiscal year 1994,
DOD recovered $181 million in such costs but waived about $273
million.  Recently, the executive branch has proposed that Congress
repeal the requirement to collect such charges on future government
to government sales. 


      EUROPEAN EXPORT FINANCING
      PROVIDED THROUGH
      GOVERNMENT-BACKED EXPORT
      CREDIT GUARANTEES
------------------------------------------------------ Appendix II:1.2

All three European countries provide some form of government-backed
export credit guarantees for both nondefense and defense exports. 
Export credit guarantees are a form of insurance covering risk of
loss due to such factors as exchange rate fluctuations or buyer
nonpayment.  They can allow access to financing for exporters
extending credit to their buyers and for overseas buyers borrowing
directly from banks.  Data on the value of guarantees for defense
exports, however, was available only in the United Kingdom.  France
and Germany report total export financing and do not differentiate
between defense and nondefense export financing.  Thus, we were
unable to obtain information on the extent of guarantees provided to
defense exports in either country. 

During fiscal year 1993/1994, the United Kingdom's Export Credits
Guarantee Department (ECGD) guaranteed about $6.1 billion in exports,
of which $2.9 billion (or 48 percent) was for defense exports.  About
90 percent of the $2.9 billion was for defense equipment sold to
countries in the Middle East, mostly to Kuwait, Oman, Qatar, and
Saudi Arabia.  Among industry sectors, military aircraft represented
about 40 percent of the $2.9 billion total, military vehicles
represented about 39 percent, and naval vessels represented about 21
percent.  In fiscal year 1992/1993, ECGD guaranteed about $5.8
billion in exports, of which $2.4 billion
(or 42 percent) was for defense exports.  About 57 percent of the
$2.4 billion was for defense equipment sold to countries in the Far
East and about 43 percent of the total was for equipment sold to the
Middle East.  Among industry sectors, naval vessels represented about
39 percent of the $2.4 billion total, military aircraft represented
about 32 percent, and munitions and missiles represented about 27
percent. 


   ADVOCACY BY HIGH-LEVEL
   GOVERNMENT OFFICIALS
-------------------------------------------------------- Appendix II:2

The French and U.K.  governments have historically sent ministers of
defense, ambassadors, or prime ministers to persuade foreign buyers
to buy their national defense products.  The German government has
generally avoided using high-level government officials to promote
defense exports, in part because such exports are a sensitive
political issue in Germany.  In the United States, defense exports
have been approved to further U.S.  national security and foreign
policy goals.  Nevertheless, as part of the U.S.  government's
emphasis on overall export promotion efforts, high-ranking U.S. 
officials have been increasingly willing to intervene to influence
competitions in favor of U.S.  defense companies. 

An example of high-level government advocacy is the Swedish
government's purchase of the German Leopard 2 tank.  The German
Chancellor and Minister of Defense advocated on behalf of the German
Leopard 2 tank, which, according to U.S.  government officials, led
to Sweden purchasing it over the French or U.S.  tank.  Other factors
contributing to Sweden's choice included the German manufacturer's
promise to buy Swedish defense material and services worth full value
of the tanks they were exporting to Sweden. 


   ORGANIZATIONAL ENTITIES THAT
   SUPPORT DEFENSE EXPORTS
-------------------------------------------------------- Appendix II:3

France and the United Kingdom each have a single organization within
their respective defense ministries with responsibility for
identifying defense export opportunities abroad, promoting and
facilitating defense exports, providing assistance with defense
equipment demonstrations and trade shows, and providing advice to
industry regarding offsets.  Although Germany does not have a defense
ministry organization comparable to those of France or the United
Kingdom, German companies involved in cross-border collaborative
efforts with those countries are able to benefit indirectly from the
export promotion activities of the French and U.K.  organizations. 
While the United States has no centralized government organization
with a comparable export promotion role, several U.S.  government
agencies provide similar support for U.S.  defense exports. 


      FRANCE AND THE UNITED
      KINGDOM EACH HAVE A SINGLE
      ORGANIZATION TO SUPPORT
      DEFENSE EXPORTS
------------------------------------------------------ Appendix II:3.1

In France, the Ministry of Defense's Delegation for International
Relations (DRI) is responsible for facilitating and promoting French
global defense sales.  DRI assigns defense attachï¿½s overseas to
promote military and armament relations with other countries.  DRI
also subsidizes missions for small business to participate in events
such as trade shows.  DRI employs roughly 200 staff--about 60 are
involved in facilitating and promoting defense sales with the
remaining staff involved in export control activities and oversight
of cooperation activities with allied nations.  DRI has an annual
budget of $7 million which is used in a variety of ways, including
Ministry of Defense participation in trade shows and subsidizing
small business missions to participate in those shows.  DRI also
serves as a liaison between the Ministries of Defense and Industry,
which, according to DRI officials, is the most important support
provided to the French defense industry.  While DRI promotes and
facilitates sales, sales are primarily handled either by defense
companies themselves or by various marketing and sales organizations. 
The French government owns 49.9 percent of the Dï¿½fense Conseil
International (DCI).  DCI serves as a consultant to buying countries
to help them define their operational needs, weapon requirements, and
specifications.  The remaining 51.1 percent is owned by
private-sector marketing and sales organizations. 

In the United Kingdom, the Ministry of Defence's Defence Export
Services Organisation (DESO) is responsible for assisting in the
marketing and sales efforts of U.K.  defense companies overseas,
whether manufactured nationally or in collaboration with others. 
DESO serves as a focal point for all defense sales and service
matters, including advising firms on defense market prospects on a
worldwide, regional, or country basis; providing marketing and
military assistance in support of sales; organizing exhibitions,
missions, and demonstrations; providing advice on export and project
financing; ensuring that overseas sales consideration is given due
weight in the U.K.  Ministry of Defence's own procurement process;
briefing companies new to the defense sector and to exporting; and
monitoring offset agreements.  DESO's budget for fiscal year
1992/1993 was about $25.9 million.  DESO has approximately 350
staff--about 100 in marketing services, 50 in general policy, and 200
in direct project work.  DESO concentrates primarily on supporting
higher-value exports, although smaller companies also benefit from
DESO guidance on such matters as how best to pursue potential
subcontracts.  In addition, larger companies rely on DESO to serve as
a liaison with high-level U.K.  and foreign government officials. 


      SEVERAL U.S.  GOVERNMENT
      AGENCIES PROVIDE SUPPORT OF
      DEFENSE EXPORTS
------------------------------------------------------ Appendix II:3.2

The Departments of Defense, Commerce, and State each provide support
in promoting U.S.  defense exports.  Moreover, the U.S.  government
has long recognized the positive impact that defense exports can have
on the defense industrial base. 

Beginning in 1990 the U.S.  government began to give more prominence
to the economic value of defense exports.  At that time, the
Secretary of State directed overseas personnel to assist defense
companies in marketing efforts.  The Secretary added that individuals
marketing U.S.  defense products should receive the same courtesies
and support offered to persons marketing any other U.S.  product. 

More recently, the U.S.  government announced its National Export
Strategy, which is designed to establish a framework for
strengthening U.S.  export promotion efforts.  Although the strategy
does not target defense exports, some recommendations for improving
export promotion activities could benefit defense exports.  For
example, the strategy recommended that overseas posts prepare country
commercial guides.  The guides are to include information on the host
country's best export prospects for U.S.  companies, which may
include defense exports.  These guides are to be made available to
the public through the Department of Commerce's National Trade Data
Bank.\1

In February 1995, the President announced his conventional arms
transfer policy which included, as one of its principal goals,
enhancing the U.S.  defense industry's ability to meet U.S.  defense
requirements and maintain long-term military technological
superiority at lower costs.  The announcement indicated that once a
proposed arms transfer is approved, the U.S.  government will take
such steps as (1) tasking U.S.  embassy personnel to support overseas
marketing efforts of American companies bidding on defense contracts,
(2) actively involving senior government officials in promoting sales
of particular importance to the United States, and (3) supporting DOD
participation in international air and trade shows.\2

As part of the U.S.  security assistance program, the Defense
Security Assistance Agency and the military services implement the
Foreign Military Sales program, through which most U.S.  defense
sales are made.  U.S.  security assistance personnel stationed
overseas are primarily responsible for security assistance and
defense cooperation activities in the host country.  When requested,
these personnel provide information and support to U.S.  industry on
business opportunities in the host country, including information on
the buying countries' defense budget cycle, national procurement
process, and estimates of equipment the country currently needs to
fill defense requirements or likely future procurement plans.  In
addition, the Defense Security Assistance Agency coordinates DOD
participation in international air shows and trade exhibitions.  The
military services lease equipment to U.S.  defense companies for
display or demonstration at such events. 

The Department of Commerce has primary responsibility for export
promotion and has recently expanded its export promotion activities
to include defense exports.  For example, Commerce prepares market
research reports on various countries.  These reports identify trade
opportunities in the host country, including those in defense trade. 
Other information on the host country included in these reports
includes information on market assessment, best sales prospects, the
competitive situation, and market access.  These reports are made
available to the public through the National Trade Data Bank.  Other
activities include preparing U.S.  and Foreign Commercial Service
Officer guidance on supporting defense exports.  This guidance
directs officers to provide information similar to that provided by
the Defense Security Assistance Agency and the military services. 
Moreover, the Departments of Commerce, State, and Defense participate
in defense industry liaison working groups to assess improving U.S. 
government support for U.S.  defense exporters. 



(See figure in printed edition.)Appendix III

--------------------
\1 The National Trade Data Bank is a computerized information system
containing export promotion and international trade data collected by
17 U.S.  government agencies.  The data bank is released on CD-ROM
disks. 

\2 The announcement recognized that, in accordance with existing law,
participation in such exhibitions must have the Secretary of
Defense's determination that participation would be in the national
interest and Congress must be notified. 


COMMENTS FROM THE DEPARTMENT OF
DEFENSE
========================================================== Appendix II

See comment 1. 


The following is GAO's comment on the Department of Defense's (DOD)
letter dated March 8, 1995. 

GAO COMMENT

1. We have not included DOD's technical annotations to our draft
report but have incorporated them in the text where appropriate. 




(See figure in printed edition.)Appendix IV
COMMENTS FROM THE DEPARTMENT OF
STATE
========================================================== Appendix II



(See figure in printed edition.)

See comment 1. 

See comment 1. 

See comment 2. 


The following are GAO's comments on the Department of State's letter
dated March 17, 1995. 

GAO COMMENTS

1. We have modified the report to reflect this comment. 

2. We have not included the attached list of suggested editorial
changes but have incorporated them in the text where appropriate. 




(See figure in printed edition.)Appendix V
COMMENTS FROM THE DEPARTMENT OF
COMMERCE
========================================================== Appendix II


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix VI

NATIONAL SECURITY AND
INTERNATIONAL AFFAIRS DIVISION,
WASHINGTON, D.C. 

Ernest A.  Doring
John Neumann
Katherine V.  Schinasi
James F.  Wiggins

EUROPEAN OFFICE, FRANKFURT,
GERMANY

Mary R.  Offerdahl
Cherie M.  Starck

