Global Defense Business and Arms Proliferation

Chapter 1

Global Defense Businessand Arms Proliferation

ContentsPage

OVERVIEW AND PRINCIPAL FINDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3Principle Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12Why Congress Should Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . 16The Policy Dilemma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

ISSUES AND OPTIONS FOR CONGRESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20Historical Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20The Spread of Defense Technology and Defense Industry . . . . . . . . . . . . . . . . . . . . . . . . . 22Global Trade in Advanced Conventional Weapons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

FiguresFigure Page

1-1. Major Arms Exporters, 1968-87 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41-2. Worldwide Licensed Production of Major Conventional Weapon Systems,

by Country Issuing License, 1960-88 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41-3. Worldwide Licensed Production of Major Conventional Weapon Systems,

by Country Receiving License, 1960-89 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51-4. Arms Exports by Major NATO Weapons Producers, 1978-88 . . . . . . . . . . . . . . . . . . . 51-5. Average Annual Arms Exports, 1982-86, and Arms Exports

as a Percent of Total Arms Production, 1984 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61-6. Major Arms Importers, 1983-88 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61-7. Estimated Worldwide Licensed Production of Major

Conventional Weapon Systems, 1960-88 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71-8. Licensed Production of U.S. Major Conventional Weapon Systems,

. . . . .

by Country Receiving License, 1960-88 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81-9. Estimated Licensed Production of Major Conventional Weapon Systems

by Developing Nations, 1960-88 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91-10. Arms Exported by Developing Nations, 1978-88 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111-11. U.S. Government and Commercial Sales Deliveries of U.S.

Military Equipment, and U.S. Military Grants, 1978-88 . . . . . . . . . . . . . . . . . . . . . . . . . 121-12. U.S., U.S.S.R., and European Arms Exports as Percentage

of All Transfers, 1984-88 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161-13. World Arms Transfers to Iran and Iraq, 1978-88 ● . . . . . . . . . . . . . . . . . . , . . . . * , . . , . . 181-14. Arms Transfers to Iraq by Country, 1984-88 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181-15. Percent of Foreign Military Grants Earmarked by Congress, 1982-91............211-16. U.S.-European Defense Industrial Cooperative Arrangements . . . . . . . . . . . . . . . . . . . 25

TablesTable Page1-1. Selected Weapons Exported by the United States, Soviet Union,

and NATO Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101-2. U.S.-European Defense Industrial Cooperative Arrangements, 1986-89 . . . . . . . . . . . 141-3. Developing Nations’ Arms Exports to Iraq, 1982-89 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191-4. Recent U.S.-Japan Coproduction Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23l-S, French Weapons Transferred to Iraq, 1981-88 . . . . . . . . . , . . . . . . . , . . . . , * * . * . , . , * * . 241-6. Major U.S. Weapon Systems Produced Under License

by South Korea and Taiwan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271-7. DSAA Field Staff, 1989-92 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

Chapter 1

Global Defense Business and Arms Proliferation

OVERVIEW ANDPRINCIPAL FINDINGS

The war in the Persian Gulf graphically demon-strated the consequences of extensive internationalcommerce in powerful advanced conventional weap-ons. At the same time, the end of the Cold War andthe accompanying decline in defense spending haveweakened the political foundation for continuingarms transfers and enhanced the economic motiva-tions for international arms sales. Worldwide, thedefense industries face deep recession (and probablepermanent adjustment to much lower levels of pro-duction) brought on by a general erosion of demandand continued strong overcapacity of production.

Governments take widely differing approaches tothe arms trade. Some help their defense companiesseek export markets to compensate for insufficientdomestic procurement budgets. Some nations viewarms sales as an important source of export revenue,away to spread development costs for new weapons,and a source of domestic employment. Others seekto enhance their stature as regional or internationalpowers by building up a capable defense industry.One country, Japan, has prohibited the export ofarms as a matter of public policy.

Traditionally, the U.S. Government has viewedarms sales and transfers primarily as instruments offoreign policy-to exert regional influence, to strength-en alliances, and to oppose the expansion ofCommunist power. In the past 2 years, somegovernment officials have become concerned overthe likely loss of important elements of the domesticdefense industry as companies adjust to dramaticdeclines in domestic procurement; they have be-come more sympathetic to the desire of U.S. defensecompanies to increase export sales.l Internationalsales, however, proliferate advanced weapons and

often involve collaborative production arrange-ments with far-reaching consequences.

This situation poses a major national policydilemma—how to balance the use of arms exportsas instruments of foreign policy, pressure bycompanies for greater access to foreign markets,the need to stem a dangerous worldwide armsbuildup, and the increasing proliferation of bothdefense equipment and defense industry. Thisreport, the final product of OTA’s assessment oninternational collaboration in defense technology,explores the form and dynamics of the internationaldefense industry, the intricacies of technology trans-fer and equipment sales, and the implications forUs. policy.

Several factors suggest a review of U.S. policy onarms exports and collaboration in military technol-ogy:2

●

●

The winding down of the Cold War is exertingan immediate and powerful downward pressureon defense expenditures in the West as govern-ments implement budget cuts and force reduc-tions associated with decreased East-West ten-sions;The emergence of new centers of advanceddefense industry and technology is acceleratingthe proliferation of modern weapons (andincreasing overcapacity in worldwide weaponsproduction); andWestern nations have helped arm Iraq, the restof the Middle East, and other regions with littleconcern or oversight about the near-or far-termconsequences.

The end of the Cold War has radically trans-formed the structure of international relations andthe environment for international defense business.As the Persian Gulf War and nationalist struggles

l~e Dep~ent of State and the Defeme Security Assistance Agency contend that the United States should use forei~ Saks tO Support cOM.heddomestic production of U.S. weapons systems: ‘‘Unless we adjust to the challenge of an increasingly diverse international defense supply environmen~the United States will be unable to address satisfactorily the legitimate defense needs of our friends and allies, and thereby our ovvq at an acceptablecost in the coming years. Indeed, the long-term survival of a number of important domestic arms programs are tied to foreign sales: MIA1 Abrama battletar& Blackhawk helicopter, HAWK surface-to-air missile, Boeing 707 aircraf~ to name a few.’ U.S. Department of State and U.S. Defense SecurityAssistance Agency, Congressional Presentation for Security Assistance Programs, fiscal year 1992, p. 6.

%ternational collaboration can take many forms, including but not limited to transfer of technical assistance, codevelopmen~ co- and licensedproductio~ and licensed assembly. It may also involve a variety of business relationships such as revenue sharing, subcontracting, consorthq jointventure, and corporate alliance, among others.

–3–

4 ● Global Arms Trade

Figure l-l—Major Arms Exporters, 1968-87

Soviet Union

United States

France

West Germany

United Kingdom

China

Poland

Czechoslovakia

Italy

r’::::::::::::::::.. .,,...:{::: ~:)::::

l!!. . . . . . . . . . .:,:.:.:.:.::;:j~:j;:+:+:.,.,....

120

!#l!

115

Soviet arms export data maybe overstated because ACDAexcludes U.S. military construc-tion programs and many dual-usevehicles, but includes them forthe Soviet Union.

I 1 , , k I

o 10 20 30 40 50 60 70 80

Constant 1988 dollars, billions

■ 1968-72 ❑ 1973-77 ❑ 1978-82 ❑ 1983-87

SOURCE: office of Technology Assessment and David J. Louscher, fromdata in U. S. Arms Control and Disarmament Agency, WorldMilitary Expenditures and Arms Transfers, various years (Wash-ington, DC: U.S. Government Printing Office).

throughout the former sphere of Soviet influenceattest, it is still too early to fill in the outlines of theemerging world order. Nevertheless, the threat ofSoviet expansionism is greatly reduced, the possibil-ity of a Warsaw Pact invasion of Western Europe hasbeen eliminated, and the Soviet Union appears to befollowing a policy of restraint in arms exports.Accordingly, the defense equipment requirements ofthe United States and its European Allies arediminishing sigificantly. Moreover, a principalreason why the United States transferred weaponsand defense technology to allied and friendlynations-to counter Communist influence-has beenreduced.

The winding down of East-West antagonisms,however, has left profound uncertainty as to thenature and extent of future military threats to theUnited States, its allies, and its foreign political andeconomic interests. The threat may come from avariety of heavily armed nations that, like Iraq,oppose U.S. interests and forces in places and forreasons that cannot be easily anticipated. It mayconceivably come from reconstituted elements ofthe Soviet empire. In a multi-polar world the threatof sporadic militarism will be reinforced and magni-fied by the availability of potent weapons and theknowledge of how to make and use them.

Another major factor affecting policy is theproliferation of the defense industries.3 The armsproduction and export capabilities of a number ofcountries have expanded—in the United States,Europe, the Middle East, the Indian subcontinent,South America, and the Western Pacific (see figurel-l). Increasingly, defense trade combines sales offinished defense systems with transfer of the under-lying technologies and industrial infrastructure neces-

Figure 1-2—Worldwide Licensed Production ofMajor Conventional Weapon Systems,by Country Issuing License, 1960-88

United States

France

Soviet Union .

West Germany

Israel

ltaly

China

Brazil

,

Toal number of licensesissued (whole bar)

‘ Licenses issued to developingcountries (black section)

, 1 , 1 (, 1

0 20 40 60 80 100 120 140

Number of major systems licensed10 other countries issuing fewer than 4 Iecenses not shown.

SOURCE: Office of Technology Assessment, from data in StockholmInternational Peace Research Institute, SIPRI Yearbooks, 1970through 1990, World Armaments and Disarmament.

3chs. 3 through 11 document this process.

Chapter 1--Global Defense Business and Arms Proliferation ● 5

Figure 1-3-Worldwide Licensed Production ofMajor Conventional Weapon Systems,by Country Receiving License, 1960-89

Japan-.:.:.:-:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.+.:.:.:.:.

. . .. . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . .. .. . . .

Romania

North Korea . . ... .. . . . ... .. . .. ... . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . ...:-:-:.:.:-:.:.:-:-:.:.:-:.:.:-:.:.:-:.:.:.:.:.:.:.South Africa ,

..... .. .. . . .... . . .. .. . .. . . . . . . .. . .. . . . .. . . . . . . . ... .. . .. . . . . . . . . . . . . .. . .. . . . . . . . . . . . . . . . . . . .. . . . . .. . . . .. .

Canada::::::::::::::::::::::::::::::::::::::::::::::::

United States ~.:::::::::::::::::::::::::::::::::::::::::

A u s t r a l i a

West Germany

S w i t z e r l a n d

GreecePakistan

Singapore

Czechoslovakia ‘Netherlands ‘

SwedenIsrael

-::::::::.:-::::::::-. . . . . . . . . . . . . . . . . . .. . . . . . . . .EiiY3■

Gray bars indicatedeveloping countriesby World Bank criteria

● 18 countries producedfewer than 3 major

weapon systems underlicense. They do notappear in this figure.

~

O 5 10 15 20 25 30

Number of major systems licensed

SOURCE: Office of Technology Assessment, from data in StockholmInternational Peace Research Institute, SIPRI Yearbooks, 1970through 1990, World Armaments and Disannarnent.

sary for indigenous production (see figures 1-2 and1-3). (These two subjects—arms sales and technol-ogy transfer-are examined in tandem throughoutthis assessment.) If Congress intends to exertauthority in the arms transfer field, it will have todevelop clear policies regarding the transfer ofU.S.-origin defense technology to foreign nations.

Defense companies in Europe produce equipmentfor export markets that is often as good as andsometimes better than that exported by the UnitedStates. 4 European governments often conduct ex-

tensive diplomacy in support of arms sales. In thepast, this has provided strong competition for U.S.arms exporters, especially in the Middle East, butalso in the Western Pacific. Since 1986, however,U.S. arms exports have increased to a 10-year high,while NATO Europe arms exports have fallen (seefigure 1-4). In 1988, the last year for which completedata are available, the United States exported $14.3billion in arms, compared to $4.1 billion for all ofNATO Europe. If this trend continues, it may placethe United States in a position to exert profound influence on the course of weapons proliferation. Onone hand, the United States may choose to press itspresent advantage, attempting to increase armsexports to the limits of existing markets. On theother hand, as the principal arms exporter in theWest, the United States might decide to exercise

Figure 1-4-Arms Exports byMajor NATO Weapons Producers, 1978-88

16

14

12

10

Constant1 9 8 8 8

dollars,billions

6

4

2

0

w e ● --T.,..t

. .

I 1 , 1 1 t I 1 11 1 I

1978 1980 1982 1984 1986 1988

Year

SOURCE: U. S. Arms Control and Disarmament Agency, World MilitaryExpenditures and Arms Transfers, 1989 (Washington, DC: U.S.Government Printing Office, 1990), pp. 88, 111.

d’l%eunit~ StatCS Still maintains a lead innext-generation defense technology and systems such as the B-2 stealth bomber and the Advanced ’IhcticalFighter, but it does not export these systems or share the embling technologies.

Figure 1-5-Average Annual Arms Exports, 1982-86,and Arms Exports as a Percent of Total

Arms Production, 1984

i--l--~. . . . . . . . . . .~—

1 FM,:.:,: I t a l y+:.:.:

; Israel

I Fe::: Spain:.

:;Ew; United Kingdom: . . . . . . . . . . . . . . .

Sweden ~

. . . . . . . . . . . . . . . . . . . . . . . .. . . . . .. . . .. . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .I I I

1 1

12 10 8 6 4 2 0 20 40 60 80 100

Average annual arms exports Arms exports as percentConstant 1988 dollars, billions of production

SOURCES: U.S. Arms Control and Disarmament Agency, World MilitaryExpenditures and Arms Transfers, 1989 (Washington, DC:U.S. Government Printing Office, 1990), and StockholmInternational Peace Research Institute, SIPRI Yearbooks1986, World Armaments and Disarmament (Oxford: OxfordUniversity Press, 1986), p. 336.

its leadership and propose to its Allies ways andmeans of reducing commerce in modern conven-tional weapons.

For reasons of national security, nations arewilling to underwrite the costs of indigenous devel-opment and production of weapons, even in the faceof worldwide overcapacity in the defense industries.Many, including the United States, feel much morecomfortable if the source is at home. But mostnations cannot buy enough domestically produceddefense materiel to keep unit costs tolerably low.With the exception of the United States and Japan,procurement officials and company executives be-lieve they must produce weapons for export marketsin order to fund the next generation of weaponssystems (see figure 1-5). This has created a large

flow of advanced weapons to developing countrieslike Iraq, Saudi Arabia, India, Syria, Iran, and others(see figure 1-6). Only Japan has been willing andable to subsidize enormous costs for limited produc-tion runs of sophisticated defense equipment. Oper-ating under a U.S.-imposed constitution and a highlyprotective U.S. security umbrella, Japan is the onlyadvanced industrial nation to renounce unilater-ally both the export of weapons and the projec-tion of military power in international affairs.

The proliferation of the ability to produce modernarms (emanating principally from the United Statesand Europe) has led directly and indirectly to thearming of our adversaries as well as our friends. AsOTA previously reported, U.S. companies played amajor role in the transfer of sophisticated defensetechnology to Europe, Japan, and elsewhere.6 Thiswas accomplished largely through internationalindustrial collaboration, including joint ventures,licensed production, codevelopment, and direct

Figure

Iraq

Saudi Arabia

India

Syria

Iran

Cuba

Vietnam

Angola

Afghanistan

Israel

Taiwan

SOURCE: U.S.

1-6-Major Arms Importers, 1983-88

● Significant producers● * Significant exporters

0 5 10 15 20 25 30 35 40 45


Arms Control and Disarmament Agency, World MilitaryExpenditures and Arms Transfers, 1989 (Washington, DC: U.S.Government Printing Office, 1990).

%Itis repo~ ~eu= of tie tem ‘developing” generwy follows that of the World Bank-low and middle income countries, incIudiw dl tiemtionsof Africa, Latin America, and Asia, excluding Japan.

GFor an a~ysis of the U.S. contribution to the development of the European and East Asian defense industries, see U.S. congress, office ofTechnology Assessmen<Arnn”ng Our Allies: Cooperation and Competition in Defense Technology, OTA-ISC-44) (Washingto~ DC: U.S. GovernmentPrinting Oft3ce, May 1990), passim.

Chapter l-Global Defense Business and Arms Proliferation ● 7

Figure 1-7—Estimated Worldwide Licensed Production of Major Conventional Weapon Systems, 1960-88

180

[“”””””

Total number of licensed systems in production*160 ------ - ~~~

0— — -

40 - -“””” ““”- ““”’-” ‘“”-”-’””- ““ -/ - Total systems licensed annually (whole bar)U.S.-origin systems licensed annually (bottom section)

11 I Io-q~ !=; -;. . . .. . . . . . .

1960 1964 1968 1972 1976 1980 1984 1988

Year license granted

● Estimates based on the assumption that an average system is produced under license for 12 years.

SOURCE: Office of Technology Assessment, from data in Stockholm International Peace Research Institute, SIPRI Yearbooks, 1970 through 1990, WorldArmaments and Disarmament.

offsets (see figures 1-7 and 1-8).7 Figure 1-7 showsthe growth of worldwide licensed production ofmajor weapons systems, including those licensed toother countries by the United States.8 However,figure 1-7 substantially understates the magnitude oftechnology transfer because it does not count thecodevelopment or licensed production of separateparts or components, which may constitute themajority of all international collaboration. Amongmany possible examples, the United States hasrecently transferred highly advanced productiontechnology for the Stinger missile to Germany,Belgium, Greece, Italy, the Netherlands, and Tur-key; for the Patriot to Japan and Italy; and for the

AIM-9L Sidewinder air-to-air missile to Japan,Germany, Norway, Italy, and Taiwan.

U.S. and European defense firms have not onlysold hardware but have also helped to build up thedefense industries of newly industrialized nations.9

This is often accomplished through complex foreignsales agreements in which the buyer purchases, forexample, a few copies of an advanced fighter or tank,assembles a second batch under license, and manu-factures the rest indigenously (also under license) tothe extent that its industrial base can absorb andproduce the technologies in question. U.S. firmsmay compete among themselves or with their

% a direet offset arrangement, the seller agrees to let the buyer manufacture parts and components of a weapons system as a condition of the srde.The seller often provides training and teehnical assistance and transfers technology suftlcient for the buyer to undertake indigenous production of theparts or components in question. Aeeording to one deftitioq offsets include “a range of industrial and commercial compensation practices rquiredas a condition of purchase of military exports. ” See Offsets in Military Exports (lW.shingtoq DC: Executive Office of the IYesideng Offke ofManagement and Budget December 1988), p. 3.

8Fiwe 1.7 show5 a level~ off and sli@t d~~e in the number of major weapons systems produced under liCen8e, bo~ worldwide ad forU.S.-origin equipment. This is due in part to the 12-year production cycle (assumed in the figure) and partly because the number of new systems licensedis relatively constant throughout the 1970s and 1980s. However, 1988 (the last year for which data are available) saw the largest number of new systemslicensed and the greatest increase in the number of new license agreements for U.S.-origin equipment.

9c~. 5 @rael) ~d 7 ~ugh 11 (southKore~ Br~l, ~~, ~w~ Aus&~a, s@ppom, bdonesti) analyze the defense industries of thtXell&ltiOIIS.


European counterparts to make such a sale. A majorsale can become a contest between two or moreU.S. companies to see which is willing to sell themost defense technology at the lowest price.

The proposed transfer of advanced U.S. fightertechnology to South Korea, the Korean FighterPlane, is a case in point. In 1989, South Korea agreedto buy 120 twin engine F/A-18 fighter aircraft from

Figure 1-8—Licensed Production ofU.S. Major Conventional Weapon Systems,

by Country Receiving License, 1960-88

JapanItaly

South KoreaTaiwan

United KingdomWest Germany

FranceAustraliaBelgium

BrazilCanada

NetherlandsSweden

TurkeyChileIsrael

ArgentinaEgypt

IndonesiaSwitzerland

DenmarkMexicoNigeriaNorway

PeruSpain

ThailandSouth Vietnam

E ●+:.:.:.:.:.:.:+ ●. .. . . .. .. . . . . .. . . ...

1

~::::::::::.:.:.:.:.:i i im“m“I*

Gray bars indicate developingcountries by World Bank criteria

O 5 10 15 20 25 30

Number of major systems licensed

* Countries that also issue licenses


Photo credit: U.S. Army

The Stinger missile, which crippled the effectiveness ofSoviet air power in the Afghan war, is produced under

license by six European nations.

McDonnell Douglas for $5 billion, with 12 planes tobe purchased off-the-shelf, 36 assembled fromU.S.-built kits, and 72 produced under license inKorea. But by 1991, the price had risen to $6.2billion, and the Koreans were demanding sophisti-cated radar, software, and composite materialstechnologies that the company was reluctant torelease. After nearly 2 years, South Korea broke offnegotiations and decided to buy the General Dynam-ics (GD) F-16 fighter instead. GD’s ability to offerthe F-16 at a lower price and to add additionaltechnology, an advanced radar, and air-to-air mis-siles were decisive factors.10

The United States and Europe routinely transfer agreat deal of advanced defense technology to lessdeveloped nations. In 1988, for example, India,Egypt, Indonesia, South Korea, Taiwan, and Brazilwere producing 43 different major weapons underinternational licensing agreements (see figures 1-9,1-2, and 1-3).11 As a consequence, several of thesenations have attained significant defense industrial

loT)re Washington Post, Mar. 29, 1991, p. Fl; Wall Street Journal, Mar. 29, 1991, p. A3; Defense News, @. 1, 1991, P. 4.ll~jorvstems ~msfmedhaveincluded~e U.S. Ml Abrarns&@(to Egypt), theU.S. F-16 fighter and Multiple Lauch Roeket SYstem (to ~ey)>

the German Type 209 submarine (to Brazil and South Korea), the France-German Alpha Jet (to Egypt), the Soviet MiG-27 fighter (to India), theAnglo-French Jaguar fighter (to India), the U.K. Swingfiie antitank missile (to Egypt), the French Super Puma helicopter (to Indonesia), theFrancO-German Milan antitank missile (to India), the German BK 117 helicopter (to Indonesia), among others.


Figure 1-9-Estimated Licensed Production of Major Conventional Weapon Systemsby Developing Nations, 1960-88

100 -- --

i . . . . : . . ~ ”

9 0 . .

80 ~~• ~~• Total number of systems producedunder license by developing nations* ““ ““” ““- ““” ““ “’

. .

70 -- --- ~~• - -- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6 0 - - - - - - . .

Numberof major 50 ---- ~~~~~~~~~~~~ Total systems licensed annually

Number of U.S.-origin(whole-bar)

systems produced ~~• U.S.-origin systems licensed

under license by annually (bottom section)

/ ‘Y’ ~developing nations* .

4

— — - .

--y- ~ .- . . . ..3..< . . . . . . . . . . . . . . . . . . . . . ./ “- .

10:;=,~;~~n~L~~:L-:~:np:i-:n:n=o . . . . . . . - . . . . . . . :::::::: . . . . . . . ::::::: ::::::::. . . . . . . .. . . . :.:.:,:. . . . . . . . . . . . . . . .. . . . ..,...,.. . .

1960 1964 1968 1972 1976 1980 1984 1988

Year license granted

● Estimates based on the assumption that an average system is produced under Iicense for 12 years.

SOURCE: Office of Technology Assessment, from data in Stockholm International Peace Research Institute, SIPRI Yearbooks, 1970 through 1990, WorldArmaments and Disarmarnent.

capacity and have entered the arms export business.Between 1978 and 1988, the arms exported by Israel,Brazil, Spain, and South Korea amounted to $16billion (see figure 1-10). The multiplicity of sources(both advanced and developed countries) has pro-duced a buyers’ market in which a range of moderndefense equipment is generally available to anynation that can pay for it (see table l-l).

A final factor influencing policy is that many U.S.defense companies are in financial trouble. De-creased procurement budgets and the rapidly esca-lating cost of weapons systems have combined tothreaten the long-term economic viability of manydefense companies as presently constituted. In thepast 3 years, a handful of U.S. firms have collec-tively written off over $3.5 billion in R&D invest-

ments.12 The impact of decreased defense business—large lay-offs and production cut-backs-has andwill continue to be felt in congressional districtsacross the Nation.13

Some defense executives would like to expandinternational sales and collaborative ventures toincrease their customer base and revenues in adeclining market.14 But they have been hindered bygovernment ambivalence, by rapidly increasingforeign competition, and by limited demand in manymarkets. International business has been importantto a number of major U.S. defense producers formany years; it will be increasingly critical to somecompanies as U.S. military procurement budgetscontinue to fall in the 1990s. Some importantweapons plants may have to shut down, and defense

[email protected]~eNW~, Feb. 18, 1991, pp. 4! 44.lqfionomicadju~~ent fi &eu.s. defe~~industries and fi~edefemeb~ereq~men~ are~eprincip~ subj@sof two ongoing OTAaasessment.s:

1) “Technology Opportunities for Economic Conversion” and 2) ‘‘Managing the Nation’s Defense Industrial Strength in a Changing SecurityEnvironment.”

h$Not all ~omp~es ~ve adopt~ ~S Straten, ~d for hose hat Mve, it is us@y ody one elementof an ovedl cOrpOrllte pkm tO adjUSt tO CkU3&d

business conditions.


Table l-l-Selected Weapons Exported by the United States, Soviet Union,and NATO Europe

Weapons systems United States Soviet Union NATO Europe

Main battle tanks Ml Abrams T-80, T-72M1A1M60 T-64

Fighter/attack aircraft F-16 Falcon MiG-29 FulcrumF-15 Eagle SU-27 FlankerF/A-l 8 Hornet SU-24 Fencer

MissilesAir-to-air AIM-9M Sidewinder AA-8 Aphid

AA-2 AtollAIM-7F Sparrow AA-7 Apex

Antiship RGM-84A Harpoon SS-N-2 Styx

Antitank BGM-71 D TOW-2 AT-4 SpigotAT-5 Spandrel

SOURCE: Office of Technology Assessment, 1991.

executives argue that international sales could keepthem open. These factors generate strong pressuresfor international collaboration in defense technologyand for export of top-of-the-line military equipment.

Many U.S. defense executives argue that they donot bargain away their best technology. This allowsthem to maintain an edge over the competition forthe next sale, and assures that the United States willalso enjoy a military advantage in the event U.S.troops have to face U.S.-made weapons, or thosederived from U.S. designs, in combat. But theproblem of proliferation is more complex. Advancedweapons systems—both old and new-emanatefrom many different sources and tend to fuelregional instabilities. Although they have not beenin production for many years, F-4 Phantom aircraft,M-60 tanks, AH-1 Cobra helicopters, SS-1 Scudballistic missiles, and MiG-23 Flogger fighters (toname a few) are powerful weapons that can generatesevere military, political, and psychological pres-sures when transferred to regions where they havenot previously been deployed.

The Persian Gulf War heightened the short-termbusiness prospects for a few U.S. defense compa-

Leopard 2 (Germany)Challenger (U. K.)Leopard 1 (Germany)Chieftain (U. K.)AMX-30B2 (France)Vickers Mk 3 (U. K.)OTO Melara OF-40 (Italy)

Mirage F-1 (France)Mirage 2000 (France)Tornado (U. K., Germany,

Italy)

R550 Magic (France)

R530 (France)Aspide (Italy)Sky Flash (U. K.)Exocet (France)Sea Eagle (U. K.)Sea Skua (U. K.)Penguin (Norway)Milan (Franoe, Germany)Eryx (France)HOT (France, Germany)Cobra (Germany)Swingfire (U. K.)

Photo credit: U.S. Army (Frank Trevino)

The Patriot, which became a household name during thePersian Gulf War, is produced under Iicense by

Japan and Italy.


ChinaYugoslavia

North KoreaIsrael

BulgariaBrazilSpain

South KoreaEgypt

PortugalLibya

PakistanChile

TurkeyGreece

CubaArgentina

IndiaSingapore

Figure 1-10 --Arms Exported byDeveloping Nations, 1978-88

s.:-:.:+:s+:+:+:-:.::.:,..:.:.:.:.:.:.:.:.:+:.:.:.. . . . . . . . . .:.:.:.:.:.:.:.:.:.:.:. .. . . . . . . . . . .. . . . . . . .

:::::::::::::::::::.. . . . . . . . . . . . . . . . . .

E. `. . .:::::::::. . . . .:::::::::::::::.. . . . . . . . . . .. . .. . . . .:.:.:.:.:.. . . . . . . . . .. . . . . . . . . . .:.:.:.:.:.:.:.:.:.:.:.. . . . . . . . . . . . . . . . . . . . . .

!+::.:.. . . . .. . . . .. . . .I

1 -r-+---0 2 4 6 8 10 12 14 16


❑ 1978-82 ■ 1983-88

SOURCE: U. S. Arms Control and Disarmament Agency, World MilitaryExpenditures and Arms Transfers, 1989 (Washington, DC: U.S.Government Printing Office, 1990).

nies; however, in part because the United States didnot lose major equipment, the war will not reversethe downturn in defense business of the late 1980s oreven significantly mitigate it. Defense recessioncomes at a time when the industry is plagued withovercapacity worldwide. The breakup of the War-saw Pact, coupled with increasingly cordial East-West relations, makes it very likely that thisrecession may in fact be a fundamental adjustmentto lower levels of defense production across theboard.15

Photo credit: U.S. Army

The M-60 tank is no longer in production inthe United States.

The United States has never viewed arms transfersprimarily as a sector in international trade. Indeed, asubstantial amount of equipment and training istransferred through various grant programs (seefigure 1-1 1). In addition, the Foreign Military Sales(FMS) program is structured to place foreign policygoals above economic considerations. In an FMSsale, the recipient country makes a formal request tothe United States for security assistance, the StateDepartment evaluates the request from a policystandpoint (and may or may not authorize it), and theDepartment of Defense implements it.l6 In mostcases, the U.S. Government then buys the equipmentfrom U.S. companies and transfers it at cost (plus a3-percent administrative fee) to the recipient nation.

In recent years, however, direct commercial sales(DCS), in which a U.S. company delivers armsdirectly to a foreign corporation or government,have expanded significantly .17 In a direct sale, a U.S.company and a foreign government (or firm) reachan agreement and then apply for the requisitepermissions and export licenses. Compared to anFMS sale, profits from DCS sales are often higher,

lsFor an overview of issues facing U.S. industrial base planners see, U.S. Congress, Oftlce of Technology ASStXSIIMXK Adjusting to a New sec~~”tyEnvironment: The Defense Technology and Industrial Base Challengdackground Paper, OTA-BP-ISC-79 (Washingto~ DC: U.S. GovernmentRinting OffIce, Febrwuy 1991).

16The Defe~ &.~~ ~s~~= Ageqr @sAA) ~ the defeme agency re.pnsible for implementation of foreign W- Sit&3. DSAA maytransfer equipment a.heady in stock or it may order additional materiel and defense-related services from U.S. companies to complete the seeurityassistance package. Increasingly, DSAA may also handle licensed production and codevelopment transfers under the FMS program, for example, theFSX fightex program with Japan.

ITFor the purpose of measuring arms transfer activity, the distinction between an arms sale and an arms delivery is important. In the terms foreignmilitary sale (FMS) and direct commercial sale (LXX), the word “sale” means that an agreement to sell has been reached and approved. Some of these“sales” are nevcx conaumms ted, i.e., for one reason or another, they may not result in the transfer of equipment or technology to a foreign country. Forthis reaaou the &ta in this report refer to equipment or technology that has actually been delivered. Such deliveries often do not occur until 2 or moreyears after the “sale” is made.

\Figure I-l I—U.S. Government and Commercial Sales Deliveries of U.S. Military Equipment, and

U.S. Military Grants,* 1978-88

18 T ““” ““

16 - -“ -- - ~~ -Total FMS and DCS sales deliveries

14 - -

12 . ... ., .. . , ..“ -

/ -. .Constant 10 - -------- _ ,. - - - . , .

- - - - < . ,

1988

.. .

f

.- . .. . - . t .

.dollars,

. - - , .. .- - - - .

. ~-,

billions 8

- - - ,. .

Foreign Military Sales (FMS) deliveries/- - - -, /

/ ’6 / “

/“, .-// “ - \ -/

4- /

Direct Commercial Sales (DCS) deliveries /- —————.——

4 /“--— -—.—- ~’\ ‘- ‘--_ - -

2 -- ‘ ----/ “ 0 ’ Total grants, including waived- - t -A——

;- - / FMS Financing, MAP and IMET———— ——- - \ ’————————

0 I I 1 1I

I

1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988

Year

* Waived FMS Financing credits+ Military Assistance Program (MAP)+ International Military Education and Training program (I MET)

SOURCE: U.S. Department of Defense, Defense Security Assistance Agency, “Fiscal Year Series,” Sept. 30, 1989, p. 2.

accountability to the U.S. Government is less, andthe overall relevance to U.S. foreign policy goals isusually smaller and less direct. Between 1983 and1988, delivery of arms under DCS agreements roseby a factor of 6 to reach $6 billion per year (see figure1-1 1). These transactions were conducted outside ofthe U.S. Foreign Military Sales program.

U.S. arms exports have become increasinglycontentious in recent years.

18 The FSX fighter

codevelopment with Japan, the denied sale of F-15EStrike Eagle fighter-bombers to Saudi Arabia, andthe 1990 proposal to sell over $21 billion of assortedequipment to the Saudis are well-known examples.Compared to just a few years ago, the stakes arehigher and have expanded to include large amountsof money (and jobs), the future health of U.S.defense companies, the transfer of technology withmilitary and commercial applications, the arming o f

potential future adversaries, and the proliferation ofpossibly destabilizing military might.

Principal Findings

Finding 1

As part of their plans for adjusting to adeclining U.S. defense budget, many U.S. defensecompanies are increasing their emphasis oninternational business. This strategy is beingpursued through selling advanced conventional weap-ons to foreign governments, and increasingly, trans-ferring defense technology to foreign companiesthrough licensed production of U.S. equipment andjoint development of new weapons systems. Theinternational operations of U.S. defense companiesexpanded throughout the 1970s and 1980s, andextensive trade and defense industrial linkages wereestablished around the globe. This process is nowbeing accelerated by a downturn in domestic defense

IsConcern over s~es to the Middle East extends well back into the 1970s. For example, see Mtiew pi~e, ‘‘Beyond the Plane Package: Arms andPolitics in the Middle East,” International Security, vol. 3, No. 1, 1978.

Chapter l-Global Defense Business and Arms Proliferation • 13

Photo credit: U.S. Air Force (M. Sgt. Don Sutherland)

Between 1958 and 1979,5,057 copies of the F-4 Phantomfighter were produced, of which 1,196 were exported to

Egypt, West Germany, Greece, Iran, Israel, Japan,South Korea Spain, Turkey, and the United Kingdom.The F-4 was also produced under license by Japan.

spending and by increased competition from Europeand several developing nations for foreign defensesales.

Finding 2

Expanding international business may increaseprofits for individual U.S. companies, but for U.S.industry overall the benefits are not so clear-cut.International defense industrial collaboration cre-ates competition for U.S. companies both in foreignmarkets and at home. Highly capable foreign de-fense firms, moreover, seek strategic business alli-ances and subcontracting relationships with Amer-ican companies as a means of penetrating the U.S.market, which is by far the largest and most lucrativein the world (see table 1-2). Some have acquired U.S.defense firms; more often, they demand a share ofthe production of U.S. weapons systems and transferof manufacturing technology as conditions of im-porting U.S. equipment. Increasingly, internationalcollaboration transfers defense technology to othercountries and results in more foreign-made defensecomponents being imported to the United States.

Photo credit: General Dynamics

The M1A1 Abrams main battle tank is the standard againstwhich all others are measured. However, continued

domestic production of the M1A1 is in doubt, becauseDoD plans to field a Block 3 tank beginning in 2002.The M1A1 is slated for licensed production by Egypt

after 1992.

Finding 3

A distinctly economic component has enteredU.S. international military sales policies in recentyears. In a departure from long-standing practice,high-ranking officers of the U.S. Army and AirForce have recently advocated foreign sales of U.S.equipment—including Ml tanks and F-16 fighteraircraft-as a means of increasing production tokeep lines open, or to reduce the unit price.19 Inaddition, direct commercial sales (deliveries), whichdo not involve the U.S. Government as an intermedi-ary buyer, have increased dramatically (see figure1-11).

Finding 4

Cooperating with foreign industry in the devel-opment and production of weapons builds uptheir indigenous defense industrial capabilities,transferring potent, advanced defense technol-ogy to foreign nations. In 1988, the United Stateswas engaged in transferring the production technol-ogy for approximately 70 major weapons systems toforeign countries, about the same number as ourNATO Allies and the Soviet Union combined (fig-

I% m offlci~ response to a direct OTA query the Army stated tie follom: ‘‘Unless speciilcally instructed to do so by an appropriate official ofthe Executive branch the Department of the Army will not encourage or promote sales of U.S. made military equipment to any foreign country. Whenit is determined to be in the best interests of the Army, to achieve specitlc stated objectives and benefits to the Army (e.g., to support the industrial base),it is Army policy to obtain such authorization so as to be able to provide support for representatives of U.S. defense industry in their competition forsales of defense articles and services in the global marketplace.”

Table 1-2—U.S.-European Defense Industrial Cooperative Arrangements, 1988-89

U.S. firm Foreign participant Product

1986DY4 Systems . . . . . . . . . . . . . . . . . . . . . . . .Ford Aerospace . . . . . . . . . . . . . . . . . . . . . .GTE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Hughes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .US West . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Six international teams . . . . . . . . . . . . . . . .1987Emerson . . . . . . . . . . . . . . . . . . . . . . . . . . . .General Dynamics . . . . . . . . . . . . . . . . . . . .

General Electric . . . . . . . . . . . . . . . . . . . . . .Hercules Aerospace . . . . . . . . . . . . . . . . . . .Martin Marietta. . . . . . . . . . . . . . . . . . . . . . .RCA-FMC-General Dynamics-CSC-General Electric . . . . . . . . . . . . . . . . .Westinghouse . . . . . . . . . . . . . . . . . . . . . . . .1988Allied Signal... . . . . . . . . . . . . . . . . . . . . . .Atlantic Research.. . . . . . . . . . . . . . . . . . . .Bendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Boeing . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Boeing . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Detroit Diesel... . . . . . . . . . . . . . . . . . . . . .General Electric . . . . . . . . . . . . . . . . . . . . . .General Motors-Allison . . . . . . . . . . . . . . . . .Hercules Aerospace . . . . . . . . . . . . . . . . . . .Hughes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Hughes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Lockheed . . . . . . . . . . . . . . . . . . . . . . . . . . . .Lockheed-Sanders. . . . . . . . . . . . . . . . . . . .LA W... . . . . . . . . . . . . . . . . . . . . . . . . . . . .Magnavox . . . . . . . . . . . . . . . . . . . . . . . . . . .McDonnell Douglas . . . . . . . . . . . . . . . . . . . .McDonnell Douglas . . . . . . . . . . . . . . . . . . . .McDonnell Douglas . . . . . . . . . . . . . . . . . . . .McDonnell Douglas . . . . . . . . . . . . . . . . . . . .Teledyne . . . . . . . . . . . . . . . . . . . . . . . . . . . .Texas Instruments . . . . . . . . . . . . . . . . . . . .Tracer Aerospace . . . . . . . . . . . . . . . . . . . .TRW, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1989Boeing . . . . . . . . . . . . . . . . . . . . . . . . . . . . .DARPA . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Ensign Bickford . . . . . . . . . . . . . . . . . . . . . .General Electric . . . . . . . . . . . . . . . . . . . . . .General Electric . . . . . . . . . . . . . . . . . . . . . .Hercules Aerospace . . . . . . . . . . . . . . . . . . .Hewlett-Packard . . . . . . . . . . . . . . . . . . . . . .Hughes-E-Systems . . . . . . . . . . . . . . . . . . .Hughes-Lockheed . . . . . . . . . . . . . . . . . . . . .Hughes-Raytheon . . . . . . . . . . . . . . . . . . . .IBM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .ITT- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Lockheed . . . . . . . . . . . . . . . . . . . . . . . . . . . .Lockheed . . . . . . . . . . . . . . . . . . . . . . . . . . . .LAW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .LAW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Martin Marietta . . . . . . . . . . . . . . . . . . . . . . .McDonnell Douglas . . . . . . . . . . . . . . . . . . . .McDonnell Douglas . . . . . . . . . . . . . . . . . . . .McDonnell Douglas . . . . . . . . . . . . . . . . . . . .

Ferranti (UK)Ferranti (UK)T h o m s o nMBB(FRG), Aerospatiale (Fr)Siemens(FRG)

Agusta(lt)Aselan(Tk) Dornier(FRG),ENSAB (Sp),

Matra(Fr),OTO Malera (It)Thomson (Fr),VDO(FRG)Intermarine(lt)Dowty(UK)Thomson (Fr), Siemens(FRG),

British Aerospace (UK), SignalPlessey (UK)

Ferranti (UK)British Aerospace (UK)Ferranti (UK)T h o m s o nThomson (Fr),Plessey (UK)Perkins Engine (UK)GEC(UK)Aerospatiale(Fr)Aerospatiale(Fr)Esprodesia(Sp)Matra(Fr)Uxenz(FRG)GEC(UK)Aerospatiale(Fr)Ferranti (UK)British Aerospace (UK),GPA(lr)GEC(UK)MBB(FRG)RoyalOrdnance(UK)Eichweber(FRG)T h o m s o nMES(lt)MEL(UK)

T h o m s o nDGA(Fr)British Aerospace/Royal Ordnance (UK)Ferranti (UK)GECRuston (UK)BAT(lt)Dassault(Fr)MBB(FRG)Aermacchi(lt)MBB(FRG)Siemens(FRG)TRT(Fr)Aerospatiale(Fr)Aerospatiale(Fr)Phillips HSA(Nd)SEP(Fr),AEG(FRG)Dowty(UK)Matra(Fr)W e t l a n dSogitec(Fr)

Technology transferTargeting podMobile subscriber equipmentRoland l/n missilesNetwork switching systemSDl theaterdefense study

Antitank system helitowPrecision guided munitions

LCD unit developrnentMinesweeper shipbuildingSR antiarm or weaponNATO AAWS bid

Missile approach warner

Electric generators for Airbus 340 and EFAMissile propulsion systemEFA power system (electronic)LCD instrumentationNATO LADS bidEngines (defense use)Small-medium horsepower turbinesAllison T-406MOA high-temperature materialsAries missilesSDI studyAir defense system bid for lcelandOsprey ASW sonarSA 365 helicopterSATNAV system bidMD-11Mast-mounted sightFee upgrade packages30mm ASP systemTank weapon gun simulation systemMOU radar technology exchangeThreat adaptation countermeasurePRC 319 HF/VHF radio

SD lfree electron laserResearch on reactive armorExplosive productsHigh-altitude reconnaissance systemT-700 engines (Blackhawk)Composite structuresAntenna test equipmentArms verification technologyPATS bidAMRAAM production64 megabit chipU.S. Air Force radio altimeter bidEuroflagLong-termMOU(commercial)FMDS bidERINT missileALFS dipping sonarMissile/munitions marketingApache AH-64 attack helicopterMission planning system


Table l-2--continued

U.S. firm Foreign participant Product

Motorola . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Nasco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Pratt & Whitney. . . . . . . . . . . . . . . . . . . . . . .Pratt & Whitney.. . . . . . . . . . . . . . . . . . . . . .Pratt & Whitney . . . . . . . . . . . . . . . . . . . . . . .Raytheon . . . . . . . . . . . . . . . . . . . . . . . . . . . .Raytheon-Martin Marietta . . . . . . . . . . . . . .

Sundstrand . . . . . . . . . . . . . . . . . . . . . . . . . .Teledyne . . . . . . . . . . . . . . . . . . . . . . . . . . . .Thiokol . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Texas Instruments . . . . . . . . . . . . . . . . . . . .Unisys . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Westinghouse . . . . . . . . . . . . . . . . . . . . . . . .

Thomson(Fr)Ficantieri(Sp)Aeritalia(lt)Airmotive lreland(lr)Nordam(UK)Thomson Sintra(Fr)MBB(FRG),ERIA (Sp)Bristol (UK),

Fokker(Nd), Plessey (UK)L a b i a lFokker(Nd)British Aerospace (UK)T h o m s o nWestland (UK), Agusta(lt)Dassault(Fr)

88000/RISC technology exchangeShipbuilding and designEnginesTest engine casesJT8/Boeing 737SQQ-32 sonarNAAWS bid

Auxiliary power systemF-50 aircraftRocket propellantObstacle evasion sys (ROMEO)EH101 sales (pending)Microprocessor coproduction

Compiiedfromthefoilowingdefense periodicals:Defense News Air & Cosmos Interavia Aerospace ReviewJane’s Defense VWekly NATO’s Sixteen Nations Flight InternationalData search conducted by Federal Research Division of the Library of Congress.SOURCE: Lt. Col. Willie E, Cole, Lt. Col. Richard C. Hochberg, and Comdr. Alfred E. Therrien, Europe 1992: Cata/ystforChangein DefenseAcquisition: Reporf

of the DShfC 1989-90 hfi/itary Research Fe//ows (Washington, DC: Defense Systems Management College, 1990), p. 45.

ure 1-7). This process has contributed to theemergence of numerous centers of advanced defenseindustry and technology, frost in Europe, next in theWestern Pacific, and increasingly among develop-ing nations around the globe.20 Each new center iscapable of transferring technology and selling weap-ons to additional countries (see figures 1-2 and 1-3).The primary result in the aggregate is expansion andproliferation of defense industrial capacity in bothadvanced and developing nations. The collateraleffect is the gradual and collective loss of controlover the destination and disposition of potentweapons emanating from many different parts of theworld.

Finding 5

All arms-producing nations, except the UnitedStates and Japan,21 have adopted policies: 1) tocollaborate with other nations to share develop-

ment costs, and 2) to export top-of-the-lineweapons systems to reach affordable economiesof scale because of the high costs of developing newWeapons. 22 This trend has resulted in overcapacity ofsupply and tough competition for sales to foreignbuyers. European arms producers, and those of thedeveloping world, export substantial proportions (asmuch as 90 percent) of their total weapons produc-tion (see figure 1-5). Many have long enjoyed strongdiplomatic and political support from their govern-ments. In contrast, the United States produces about90 percent for domestic consumption, imposesunilateral controls on its defense exports, attempts tocontrol retransfer of U.S.-made weapons to thirdcountries, and conducts defense trade in a highlyregulated environment. Nevertheless, on an absolutebasis, U.S. exports of both equipment and mili-tary technology exceed those of all our alliescombined (see figures 1-1 and 1-7).

%Vithrespect to the WesternPacific regio~ the Defense Science Board wrote the following:‘‘l’heU.S. has supported the growth of a strong Japanesedefense indus~ for many years by a policy of unilateral transfer of technology through licensed coproduction of advanced systems. Similarly, withKor% we have, in effect encouraged the build-up of an increasingly self-sufficient defense industry. Our policies have been ‘successful’ but also havecreated potential problems. They have lwmlted in capable industries, overcapacity, and with ther@ high ambitions and expectations for the future. ForKore% this means explicitpressure for third country sales. For Japa~ we reiterate the real potential for export of defenserelatedequipment as incrementalrelaxations of current government policy may occur with time.’ Defense Science Board, Defense Indusm”al Cooperation With Pacific Rim Nations,October 1989, p. viii.

Zlwhile tie United Swtw has enttied into codeveloprnent of major weapons systems with its allies, particularly ~der tie Nunn Amendment, ittypically has chosen to absorb development costs in favor of domestic development and production for new weapons systems. Japan has chosen tocollaborate almost exclusively with the United States, and has prohibited the export of weapons systems.

22French~sterof Defeme Pierre Joxe shted, “Ifyou want to be able to afford to mskeyour ow’11 we5pOIlS, yOuk’etO be able to sell them.” @ot~in the The Washington Post, Apr. 6, 1991, p. A17.


Finding 8

Photo credit: U.S. Air Force

The F-1 6 fighter is flown by 17 air forces around the worldand is assembled under license by three foreign nations;

2,006 of the aircraft have been produced in the UnitedStates and 510 in Europe.

Finding 6

Wide diversity of supply among both advancedand developing nations has degraded the use ofarms transferor their denial—as an instru-ment of foreign policy. The end of the Cold Warhas reduced a prime reason for arms transfers-tocounter those of the Soviet Union. At the same time,however, unilateral U.S. attempts to restrain thearms trade will likely fail because the buyer nationcan find alternative sources with competitive de-fense equipment (see table l-l).

Finding 7

International arms business, in which theUnited States is first among several prominentsuppliers, is building up a dangerously armedworld. In the Middle East, arms imported to theregion have raised the stakes associated with politi-cal instability and have figured prominently in thecalculations of militant religious regimes and re-gional strongmen. As the Islamic revolution in Iranhas shown, once transferred, modern weapons canoutlast the governments they were intended tosupport. As the war with Iraq has shown, arms mayoutlast the good will of the leaders to whom theywere supplied. Highly armed adversaries make itmore difficult for the United States to protect itsinterests, increasingly so in the future if the UnitedStates stays its post-Cold War course of reducing itsarmed forces and defense expenditures.

If the goal is to stem proliferation of advancedconventional weapons and defense technology,multilateral restraint by Europe, the Soviet Union,and the United States is a prerequisite. Becausethese three account for about 80 percent of all armsexports (and a higher percentage of advancedmateriel), an agreement to restrain exports couldhave far-reaching implications (see figure 1-12). Inthe context of a “new world order,” conventionalarms control is clearly an alternative to a continuingarms bazaar, especially to the Middle East. Withoutthe stimulus of a polarizing U.S.-Soviet militaryconfrontation, continued proliferation of arms to theThird World has lost much of its military andpolitical justification. Considering its recent role inthe Persian Gulf crisis, the United Nations may bethe appropriate vehicle to pursue multilateral re-straint of defense exports.

Why Congress Should Care

As the defense industries of the world becomemore capable, the problem of proliferation increasesbecause no single nation (or group of nations to date)can control the ultimate distribution of advancedweapons and the technologies necessary to buildthem.

The acquisition of weapons and military technol-ogy can and does change the balance of power

Figure 1-12—U.S., U. S. S. R., and European ArmsExports as Percentage of All Transfers, 1984-88

NATO EuropeStates%

Other 19%

41%

SOURCE: U.S. Arms Control and Disarmament Agency, Wor/d MilitaryExpenditures andArms Transfers, 1989(Washington, DC: U.S.Government Printing Office, 1990), p. 11.

Chapter l---Global Defense Business and Arms Proliferation ● 17

among nations. By exporting large quantities ofpotent weapons, the advanced industrial statescontinue to build up the ability of potentiallyrenegade or terrorist nations to threaten the use offorce and to invade weaker nations. The Iraqiinvasion of Kuwait is the most recent example; ifadvanced weaponry continues to proliferate at pre-sent rates, it is not likely to be the last. Even thoughthe U.S.-led coalition defeated the Iraqi militarywith unprecedented efficiency and few losses, trans-ferring potent weapons to foreign militaries makes itmore difficult for the United States to reduce the sizeand cost of its military and still protect Americaninterests abroad.

The Persian Gulf War also demonstrated thedestructive capability of modern conventional weap-ons; in less than 2 months, coalition forces devas-tated the physical infrastructure of Iraq and killedtens of thousands of Iraqi soldiers. This toll in death,destruction, and human suffering may only be thebeginning. Even with vastly less military hardware,Iraq’s leadership may still devastate the Kurdish andShiite Moslem populations.

Increasing proliferation of sophisticated weaponsand technological know-how has injected newelements of uncertainty and concern into interna-tional relations. The United States and othermajor exporters are gradually losing control ofthe weapons transferred as well as the technologyand industry necessary to produce and supportthem. There can be no assurance that the weaponswe and our allies make available to our friends todaywill not be used against us tomorrow. As the Iraqisituation has presaged, arms trade and collaborationwill increasingly influence the environment inwhich foreign policy decisions are made. If othernations had not armed Iraq, the United States mightnot have massed so many forces in the Persian Gulf,and the necessity of going to war might have beenaverted.

Advanced weaponry and defense technology maynot always be used for the purposes intended or stayin the hands of the regime to which they were sold.The United States alone sent about $11 billion inmilitary hardware to Iran between 1969 and 1979and trained over 11,000 Iranian military officers (see

Photo credit: Hughes Aircrafl

U.S. TOW antitank missiles were captured by the Iraqisafter the August 8, 1990 invasion of Kuwait.

figure 1-13).23 These weapons failed in their pur-pose, i.e., to enhance the stability of a friendly andmoderate regime in the region, and were later usedto wage war against Iraq. The Soviets, the French,and several developing nations supplied the Iraqiswith a vast arsenal (see figure 1-14 and table 1-3).Those weapons, and U.S. weapons captured from theKuwaitis, 24 were then available for use againstcoalition forces in the Arabian Peninsula. Futureproposals for defense industrial cooperation be-tween U.S. and European firms will have to beevaluated in light of these circumstances, as well asthe comparative permissiveness of European armsexport policies.

DU.S. Dep~rnent of Defense, Defe~e Sectity Assistance Agency, Foreign A4ilitary Sales, Foreign Military Construction sales ad MlkTAssistance Facts, Sept. 30, 1989, p. 3; and U.S. Department of Defense, Defense Sezurity Assistance Agency, Fiscal Year Series, Sept. 30, 1989,p. 101.

~EX~pleS include u.s.-rnade TOW antitank and Hawk antiaircraft mkih.

l8 ● Global Arms Trade

Figure l-13—World Arms Transfers to Iran and Iraq,1978-08

12

10

8

Constant1 9 8 8 6

dollars,billions

4

2

0

T“-””’-””””””-””””’--”’”””””’-”’--”-”””. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

I Arms transfers to Iraq

I 1 , 1 1I I

1978 1980 1982 1984 1986 1988

Year

SOURCE: U.S. Arms Control and Disarmament Agency, Wor/d hfi/itaryExpenditures andArms Transfers, 1989(Washington, DC: U.S.Government Printing Office, 1990), p. 93.

As U.S. defense companies adjust to lower levelsof domestic production, some important manufac-turing facilities may be forced to close. Beyond theimmediate economic impact, a great many defensecompanies that supply parts and components may beadversely affected, with the possibility that theUnited States could lose crucial defense productioncapabilities that have taken many years and enormous

investments to achieve. Some defense lobbyists seeincreased international business as a possible partialsolution. But there is also the consideration thatmany buyer nations, especially those with develop-ing defense industries, would likely demand a majorshare of production, offsetting U.S. gains. Manyanalysts believe that leaving adjustment of thedefense industries to economic forces may produce,a defense industry profitable for some companies,but unable to meet the future security needs of theUnited States. They argue that in the post-Cold Warera, the Department of Defense must manage thedefense industries efficiently at lower levels ofproduction, and that a policy of selling weapons toother nations just to maintain the U.S. defenseindustrial base would ultimately fail to address theunderlying problems of overcapacity and reduceddemand for defense equipment.

Increasingly, international business arrangementslead to foreign penetration of the U.S. defensemarket. Typically, a U.S. company (acting as theprime contractor) subcontracts a portion of a defensesystem to a foreign company. Many foreign defensefirms have established a strong marketing presencein the Washington metropolitan area to monitor theU.S. defense market and cement business ties withU.S. defense contractors. In addition, an increasingnumber of European companies are acquiring U.S.defense firms through foreign direct investment,essentially buying their way into the U.S. market.

Congress has given these activities increasingscrutiny in recent years. Arms transfers constitute amajor element in the continuing struggle betweenCongress and the Executive over how much influ-ence Congress can and should exert over foreignpolicy. The Executive continues to view and usearms exports as a vital and powerful instrument inthe conduct of foreign relations, and Congresscontinues to assent, sometimes reluctantly, whileusing its regulatory and oversight powers to influ-ence and circumscribe the foreign policy agenda ofthe President.

The Policy Dilemma

The state of the international defense businesslinks two issues of current concern to Congress:Controlling the proliferation of modern weapons anddefense technology and the health of U.S. defensecompanies. It is likely that a strong consensus couldbe forged on either issue in isolation; but because of

Figure l-14-Arms Transfers to Iraq by Country,1984-88

China$2.9 bi

\ I \ ‘Bulgaria2%

/ )Soviet Union 52% \ $ 1 b i l l i o n

$15 billion Czechoslovakia 2%0

$1 billion

The United States transferredno arms to Iraq during this period

SOURCE: U.S. Arms Control and Disarmament Agency, M&/d hfihryExpenditures andArms Transfers, 1989(Washington, DC: U.S.Government Printing Office, 1990), p. 117.


Table 1-3-Developing Nations’ Arms Exportsto Iraq, 1982-89

Brazil66 Astros-11 SS-30 multiple rocket launchers20 Astros-11 SS-60 multiple rocket launchers13 Astros Guidance fire control radars

200 EE-9 Cascavel armored cars300 EE-3 Jacara scout cars

China4 B-6 bombers (copy of Soviet Tu-16)

72 Hai Ying-2 ship-to-ship missiles (arming B-6 bombers)700 T-59 main battle tanks600 T-69 main battle tanks650 Type 531 armored personnel carriers720 Type 59/1 130mm towed guns128 C-601 antiship missiles

Egypt70 F-7 fighter aircraft (Chinese version of MiG-21)80 EMB-312 Tucano trainers (built under Brazilian license)

150 BM-21 122mm multiple rocket systems100 Sakr-30 122mm multiple rocket launchers90 D-130 122mm towed guns96 D-30 122mm towed howitzers

SOURCE: Office of Technology Assessment, from data in StockholmInternational Peace Research Institute, SIPRi Yearbooks, 1970through 1990, WorldArmaments and Disarmament.

the linkage, the steps needed to implement a solutionto one would tend to undermine resolving the other.

Efforts to control proliferation will almostcertainly limit the international sales of U.S.defense companies. Similarly, efforts by U.S.defense companies to expand their internationaloperations will exacerbate the problem of prolif-eration. The problem cannot be solved by a simplechoice between constraining arms exports at theexpense of a viable U.S. defense industrial base oraccepting an arms bazaar in the developing world inorder to support that industrial base.

However, with U.S. leadership, at least acqui-escence on the part of the Soviets, and coopera-tion by the Europeans, it may be possible to avoidthe potentially catastrophic consequences of armsproliferation to the developing nations. Thiseffort would require multilateral restraint inarms exports. The effects on U.S. industry mightbe mitigated by moving to a scaled-down U.S.arms production in which technological progressis sustained, adequate readiness is maintained,and profits are possible.

There is general agreement that uncontrolledproliferation of advanced weapons is not in theoverall interest of the United States. No one wantsregional instability or potent military threats to U.S.

interests abroad. But there is less agreement on howmuch proliferation is too much, where proliferationis dangerous, and to what extent arms transfers canbe used effectively as tools of foreign influence.

If the present level of arms exports is main-tained, it will add significantly to the prolifera-tion of weapons—both directly, as well as indi-rectly through the transfer of technology andproduction capabilities. One suggested approachto controlling proliferation is to restrict further theaccess of U.S. defense companies to the interna-tional market and letting them adjust as the U.S.market contracts. In this view, addressing theproblem of proliferation outweighs the businesslosses of some U.S. companies and the localeconomies they support.

Many in Congress (and elsewhere) are concernedabout economic dislocation that will result fromdeclining domestic defense procurement. Manybelieve that U.S. defense companies should diver-sify their business activities into the civilian econ-omy. Some industry spokesmen have argued thatbecause unilateral restraint is unlikely to stem theproliferation of defense technology and militarymight, the U.S. Government should adopt a policy tohelp--or at least not hinder-defense contractors.They believe U.S. companies should be allowed tocompete vigorously in the international market toincrease their profits and maintain production.

Others contend, however, that increased interna-tionalization means that U.S. defense companieswill continue to sell technology to foreign govern-ments, ultimately undermining U.S. leadership inthe development and manufacture of defense sys-tems—a process that has already taken its toll inmany sectors of international trade. From thisperspective, U.S. defense companies are nationalassets, established to serve the national security,whose operation is authorized and subsidized bygovernment, and whose products are paid for withpublic funds.

As such, U.S. defense firms are obligated tooperate under different rules than civil manufactur-ers; they are not automatically entitled to participatein unbridled international competition. The devel-opment of a truly multinational defense indus-trial sector, where corporate giants conduct R&Dand manufacturing in many countries of theworld, would because for grave concern. It wouldbe extremely difficult for the United States (or any

other country) to control the dissemination ofdefense products, and corporate planning might notbe tied to the security interests of any single countryor alliance of nations. Proponents of this view pointto the U.S. experiences in Iran and Iraq as primereasons strict controls must be applied not only bythe U.S. Government but also by our allies.

ISSUES AND OPTIONSFOR CONGRESS

Historical Perspective

The topic of conventional arms exports andcontrols has a long history, and the relevant legisla-tion and associated government programs are ex-traordinarily complex. Before turning to a discus-sion of the issues and policy options raised by thefindings of this report, a brief sketch of congres-sional and executive branch interactions over secu-rity assistance and conventional arms control ispresented. Those already familiar with this area maywish to skip directly to the next section.

Since the passage of the Foreign Military SalesAct of 1968, Congress has exerted strong oversightand has imposed numerous controls on the militaryassistance activities of the United States. These haveincluded downgrading or eliminating the MilitaryAssistance Advisory Groups at U.S. embassies,earmarking up to 99 percent of foreign militaryfinancing funds for particular countries, and restrict-ing third-party transfers of U.S. weapons under theArms Export Control Act of 1976, the InternationalSecurity Assistance Act of 1977, and subsequentregulations (see figure 1-15).

In addition to extensive reporting requirementsand regulation of arms exports, Congress has attimes mandated outright prohibition of securityassistance to countries such as Turkey, Pakistan, andIraq. Congress has also instituted an elaboratenotification process that would enable it to block aproposed sale under exceptional circumstances.These and other requirements reflect the determina-

Photo credit: U.S. Department of Defense

The AIM-9 Sidewinder air-to-air missile is producedin numerous versions and is manufactured under

license by Germany, Italy, Norway, the U. K.,Japan, and Taiwan.

tion of Congress to retain its shared responsibilitiesin foreign policy and, in particular, its power toregulate commerce with foreign nations derivedfrom article I, section 8 of the Constitution.25

Nevertheless, Congress has rarely intervenedaggressively in the U.S. foreign military salesprogram, 26 As a result, the executive branch hasexercised considerable latitude in the definition andconduct of arms sales and the transfer of defensetechnology. This is evident from the extreme changeof policy from the Carter to the Reagan Administra-tions.27 President Jimmy Carter saw the transfer ofarms ‘‘as an exceptional foreign policy implement,to be used only in instances where it can be clearlydemonstrated that the transfer contributes to pro-mote our security and the security of our closefriends.” 28 Four years later, President Reagan tookthe other extreme approach. Arms transfers would be‘‘an essential element of [U. S.] global defenseposture and an indispensable component of itsforeign policy.”29

Although the President has recently proposedthat major supplier nations exercise “collective

~T’@mas E. hlanq A Question of Balame: The President, the Congress and Foreign Policy (Washington DC: The Brw@zs ~ti~tion, 1990*pp. 4-7.

xcr~g M. Bmndt (~.), Mi/itaV A~~istance a~Foreign Policy (Wright Patterson AFB, OH: h Force hMi~te of TH~oIogY, 1989), P. 152.Z7~&w J. Pieme, The G/o&/ politics ofA~ fJazeS (~wto~ NJ: ficeton University PIWX, 1982), pp. 52-(56; Paul Y. Hammond et d., The

ReZuctantSuppZier: U.S. DecisionrnukingforAnns Sales (Cambridge, MA: Oelgeschlager, Gunn & Ha@ 1983), pp. 26&67; and Christian CatiAnnsTransfers and Dependence (New York NY: United Nations Commission on Disarmarn en~ 1988), pp. 80-82.

2SfiHiden~ Dirmtive on Arm.s Transfer poky (PD 13), my 13, 1977.residential Directive on Arms Transfer Policy, July 8, 1981.

Chapter I-Global Defense Business and Arms Proliferation ● 21

Figure l-15-Percent of Foreign Military GrantsEarmarked by Congress, 1982-91

100

90

80

70

60

Percent 50

40

30

20

10

0

t. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

t. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

t. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

L... . . . . . . . . . . . . . . . . . . . . . . . .

, , , t1 r 1 I ! , i

1982 1984 1986 1988 1990

Year

SOURCE: Defense Security Assistance Ageney

self restraint” in arms sales to the Middle East,30

the Bush Administration has also taken thefollowing steps to support foreign sales of U.S.defense equipment. It had previously directed U.S.embassy personnel to increase the level of assistanceprovided to U.S. defense companies,31 created theCenter for Defense Trade within the State Depart-ment, and proposed a “defense GATT” that wouldallow free and open trade in arms and defensetechnology within the NATO Alliance, and withother U.S. allies.32 In March 1991, the Administra-tion proposed that the Export-Import Bank guaran-tee up to $1 billion in commercial loans to membersof NATO, Australia, Japan, and Israel to purchasedefense equipment from U.S. contractors.33

Recent press reports indicate that the U.S. Armyand Air Force are for the first time publicly

supporting exports of weapons such as the M1A1Abrams tank and the F-16 Falcon fighter to keepdomestic plants running.

34 Prior to May 1991, theBush Administration had also used weapons trans-fers liberally in support of its Persian Gulf policies.It proposed the sale of over $26 billion in U.S.weapons to a variety of countries in the MiddleEast. 35 In his address to a joint session of Congressfollowing the end of the Persian Gulf War, thePresident pressed Congress for greater latitude inarms transfers.36

There is, then, a continuing tension not onlybetween Congress and the Executive concerningarms transfers, but also between the policy of armingour allies and the desire to prohibit the export ofadvanced weapons and technology to potentiallyhostile or irresponsible nations. The recent PersianGulf experience will most likely increase thesetensions. The cases presented in this report indicatethat despite long-term congressional misgivings andwidely divergent approaches by different Presidents,the knowledge and industrial infrastructure neces-sary to build advanced weaponry is proliferatingbeyond our control.37

In May of 1990, OTA reported that the UnitedStates might need to project power into regions andagainst countries that had been armed by theEuropeans. 38 That situation materialized in thePersian Gulf during operation Desert Storm, whenU.S. troops faced weapons produced by some of ourEuropean allies. Similar conditions may arise inother parts of the world. It is even possible that, intime, Americans will be sent into battle againsttroops armed with U.S.-made equipment. In thiscontext, and because the Executive has taken astrong position in support of international armstrade, Congress may wish to address a number ofissues affecting policy on arms transfers, interna-

%Nw Washington Post, May 30, 1991, p. Al, and The New York Times, May 30, 1991, p. Al.slcablefiom~~s~m~ ~glebuger fortis~or/C~ge on ‘G~&nce (Joncerning*ssy Role h Support of U.S. DefenSefipOrtmS,”

n.d.3?.@ me ~ ~d~em GA~,~ ~ s= ~~~e Fume of Defense ~d ~dustri~ Collabomtion in NATO,” a sp~h presented by And). Willism ~ tO the

German Strategy Forum and the Institute for Foreign Policy Analysis in Bonq Germany, Mar. 15, 1990.3s~s would r- the ~~ of ~ction 32 of the of the ~s fipo~ Control ~t of 1968. The N* York Tius, Mw. 18, 191, pp. Al and D6.~D~ense N@s, Dec. 17, 1990, p. 16.35~ additiow tie Aws~tion~ orches~ted forgivaess for $7 billion in p@ .s~fi@ ~SiS~~e debts for Egypt and hM agreed in prinCiple tO

permit lhrkey to sell 40 F-16 fightem to Egypt if the two countries can reach agreement on the terms of the srde,36~e ~sident s~~ “It’s time@ put an end to ~~~~ugement of foreign and s@2Urity SSsktice prO~S, Ini~O- management that humiliates

our friends and allies and hamstrings our diplomacy.” Text of the President’s address, published in The New York Times, Mar. 7, 1991, p. A8.37S+ ChS. 3 through 11 of this report for case studies of pMtiCuhlr mUntieS.3SU.S. congress, op. cit., footnote 7, p. 4-


tional collaboration, defense industrial proliferation,and the future health of the defense industries in theUnited States.

The Spread of Defense Technology andDefense Industry

The first three issues presented below address thequestion: To what extent should U.S. policyrestrict or permit the transfer of U.S. defensetechnology to foreign nations? Licensed produc-tion (and other forms of international collaboration)is generally increasing worldwide, and U.S. compa-nies account for a large share of the defensetechnology being transferred in the West.39 Theimplications for the United States of increasingcollaboration, however, vary for different partnersand also depend on the defense policies and level ofindustrial development of the individual partnernations. Accordingly, this policy discussion ad-dresses three separate cases: Japan, the advancedEuropean defense producers, and certain developingnations.

Issue 1: Defense Industrial Collaboration WithJapan

Part of the genesis of this assessment was concernin the IOlst Congress over the proposed transfer ofU.S. fighter technology to Japan—as part of the FSXcodevelopment agreement. Numerous committeesof Congress held hearings on the advisability of per-mitting General Dynamics to work closely with Mit-subishi Heavy Industries (MHI) to develop a Japa-nese indigenous fighter. A principal concern wasthat the FSX project might ultimately help Japanbecome more competitive in civil aviation markets.But the debate largely failed to address the moreimmediate questions of whether or not transferringthis capability to Japan would enhance or detractfrom U.S., Japanese, and international security, andwhat the impacts on U.S. defense companies might be.

In three respects, Japan is a special case. First, theU.S. transfers more major weapons systems to Japanthan it does to any other nation. Over the pastdecade, Japan has embarked on a rapid defensebuild-up and has developed an extensive defense

industrial sector, drawing heavily on licensed pro-duction from the United States. Because Japan is amajor export market for U.S. defense technology,the FSX codeveloprnent project represented a deep-ening of already firmly established defense indus-trial ties. It also meant business opportunities forGeneral Dynamics and its U.S. subcontractors.

Second, concerns that Japan might proliferateU.S.-licensed, codeveloped, or derivative defensetechnologies are somewhat mitigated by Japan’spolicy against export of defense equipment. Al-though this policy may change, it is anchored in thelarger U.S.-Japan security relationship, and to theextent this alliance remains stable, Japanese restraintin defense exports will probably be preserved. If,however, trade relations between the two countriescontinue to sour, a new security environment couldemerge in which Japan depends less on the U.S.security umbrella. Change could also result fromdifferent perceptions by the two countries of theirroles and interests in the evolving post-Cold Warsecurity structure. Japan might decide to do whatmany U.S. policymakers have urged for decades:take on more of the burden of its own defense. In thatcase, the United States (and the world) would find aJapan with a strong base of defense technology andan industrial sector fully capable of ramping up pro-duction swiftly in the event it was called on to do so.

Third, the flow in defense technology between theUnited States and Japan has been a one-way street toJapan, with few exceptions.40 Supporters of the FSXproject argued that Japan would make advancedradar and composite materials technology availableto the United States under the terms of the agree-ment. While it is still early in the developmentprocess, such reverse technology transfer has notoccurred, and some argue that the Japanese develop-ments in question were overrated in the first place.In general, government and corporate leaders inJapan appear eager to receive U.S. defense technol-ogy, and at the same time, reluctant to share theirswith the United States.

U.S. policy on cooperation in defense technolo-gies between the United States and Japan should

39see ~$~e u.S. A~~~~a~-. ~du~~ ~d the Trend Toward ~ternatio-tion” ~-gto~ ~: The Aerospace Industries AssOCiatiO~ hlC,,March 1988), p. 6.

@T. ~te, “eg litfle Japanese.~de defeme technolo~ @ been transferred to tie United States. However, a si@lcant but tlllkllown quantity ofJapanese high-technology products (with both civil and military applications) has been incorporated into U.S. defense systems. In general, the degreeof DoD dependence on foreign sources of supply is unknown. See U.S. Congress, General Accounting Oftlce, Zndustn”a2Base: Signzj$cance of DoD’sForeign Dependence, GAO/NSIAD-91-93 (Gaithersburg, MD: U.S. General Accounting OffIce, January 1991), passim.


factor in the unique circumstances enumeratedabove and should not ignore lessons learned fromthe FSX experience. Mired in political controversyfrom the outset, the FSX project has encounteredunforeseen technical problems and appears to be farmore expensive than its Japanese supporters ex-pected. Some now doubt the project will reachfull-scale production. Many Japanese officials re-main bitter about what they perceive to have beenless than good faith on the part of the U.S.Administration and Congress. They believed theyhad negotiated a firm agreement with the ReaganAdministration, only to have it reopened in anatmosphere of distrust and mutual recrimination.These officials now advocate greater caution, bothpolitically and technologically, making it unlikelyJapan will soon propose another codevelopmentproject on the scale of the FSX. Projects involvinglicensed production (and possibly codevelopment ofcomponents) are likely to proceed as in the past.

If maintained, the present U.S. policy to permitfrequent transfers of defense technology to Japanwill continue to build up the defense industrial baseof that nation. This, of course, raises the question ofthe rearming of Japan. Japan has increased itsdefense expenditures in real terms by about 6 percentper year for the past decade, and is by far the largestmilitary power in the Western Pacific. Few believeJapan intends to build its arsenals to levels reachedduring World War II. Nevertheless, a key compo-nent of its defense industrial strategy is to producea large number of major weapons at very lowproduction rates, developing the technological know-how and industrial infrastructure that would have toprecede a decision to rearm. If transferring majordefense capabilities to Japan is the intent ofCongress, then the present policy should bemaintained. If not, Congress may wish to con-sider prohibitions on future transfers of defensetechnology.

Japan is able to reap the benefits of much U.S.defense R&D by essentially buying it throughlicensed production, while returning little or nothingto the U.S. defense technology base (see table 1-4).Japanese officials believe that technology is aprecious commodity and, unlike many U.S. defenseindustrialists, they see it as far more valuable thanshort-term economic gains. Nevertheless, those who

Table 1-4-Recent U.S.-Japan CoproductionTransfers

F-15J Eagle fighter airoraftFSX fighter aircraftCH-47 D Chinook helicopterKV-107/2A helicopterModel 205 UH-1 H Huey helicopterModel 209 AH-IS Cobra helicopterUH-60J helicopterEP-3C Orion electronic intelligence aircraftM-1 10A2 203mm self-propelled howitzerPatriot missile batteryMlM-l 04 Patriot mobile surface-to-air missileMIM-23 Hawk mobile surface-to-air missileAIM-7F Sparrow air-to-air missileAIM-9L Sidewinder air-to-air missileBGM-71 C l-TOW antitank missile

SOURCE: Office of Technology Assessment, from data in StockholmInternational Peace Researeh Institute, SIPRI Yearbooks, 1970through 1990, Wor/dArmaments and Disarmament.

advocate collaboration argue that by transferringdefense technology to Japan, the United Statesenhances that nation’s ability to assume a greatershare of its own defense and that U.S. defensecompanies receive monetary benefits as well. Poli-cymakers will have to balance these benefits againstthe possibility that Japan could change its defenseexport policies, and that if it does, as many U.S.defense contractors believe it will, the United Stateswill have helped to create another major supplier(and a formidable competitor) in the internationalarms market.

Issue 2: Collaboration With Western Europe

The major arms-producing nations of Europe-France, Germany, the U.K., and Italy-have longcollaborated with one another in the- developmen~and production of defense equipment. Some haveadopted export-led defense industrial policies, withexports accounting for at least one-third of Europeandefense production.

41 European defense companiesaxe eager to exchange technology with U.S.-firms,although historically-because U.S. defense tech-nology was far superior-the United States hastransferred a great deal more to Europe than it hasreceived. As OTA has shown, that situation haschanged; for purposes of export and collaboration,U.S. and European defense technology and produc-tion are now roughly comparable. Many transatlan-tic subcontracting and joint-venture arrangementsare now in effect.42

AISee figure 1-5 for 1984 wpOrtS.AZU.S. Con=ss, Office of Technology Assessment, op. cit., footnote 7.

292-877 0 - 91 - 2 : QL 3


Powerful political and economic forces havetransformed the security arrangements of Europeand challenged the continued relevance and viabilityof the NATO Alliance itself. Major changes inSoviet policies, German unification, the Treaty onConventional Forces in Europe (CFE), breakup ofthe Warsaw Pact, economic integration of theEuropean Community, and the Persian Gulf Warhave all helped to undermine the basic assumptionsthat have driven East-West security relations in thepost-World War II period. While much is stilluncertain, many analysts believe Western Europewill become increasingly self-reliant, eventuallyapproaching security concerns not as individualnations or members of NATO, but from the perspec-tive of an independent, single European approach todefense. Differences in US. and European de-fense industrial and arms export practices willfigure heavily in calculating the benefits and risksassociated with a U.S. policy to permit or restrictthe transfer of U.S. defense technology to West-ern Europe.

In the past, U.S. policies to transfer technologyand arms to Europe were motivated largely bysecurity considerations and military preparationsassociated with the Cold War and the threat of apotential Warsaw Pact invasion of Western Europe.Those policies worked. In the space of a fewdecades, they helped build sophisticated defenseindustries across Western Europe. These policiesalso contributed to extreme peacetime overcapacityin the defense industries of the West and to intenseinternational competition for sales of advancedweaponry.

In reviewing the U.S. policy of transatlanticdefense industrial collaboration and technologytransfer, several factors will be important. Countrieswith whom the United States has collaboratedextensively in the past may in fact transfer weaponsand technology to nations that oppose U.S. securityand economic interests. In the past, Europeangovernments have been willing to export their mostadvanced weapons to a wide range of countries.Although they were not used effectively in thePersian Gulf War, some of the most sophisticatedweapons in the Iraqi arsenal were made in France(see table 1-5).42 It is not impossible that U.S.

Table 1-5-French Weapons Transferredto Iraq, 1981-88

NumberWeapon Type of weapon transferred

Mirage F-l C . . . . .AMX-30 Roland . . .

AM-39 Exocet . . . .ARMAT . . . . . . . . .AS-30L . . . . . . . . . .HOT . . . . . . . . . . . .Milan . . . . . . . . . . .Roland-2 . . . . . . . .R-530 . . . . . . . . . . .R-550 Magic . . . . .

Fighter/interceptorAntiaircraft vehicle, missile

armedAntiship missilesAntiradar missilesAntiship missilesAntitank missilesAntitank missilesSurface-to-air missilesAir-to-air missilesAir-to-ah missiles

143105

734708

1,2001,6004,8001,050

257534

SOURCE: Office of Technology Assessment, from data in StockholmInternational Peace Researeh Institute, SIPRI Yearbooks, 1970through 1990, WbrldArmaments and Disatrnament.

soldiers will again face European weapons on thebattlefield, weapons that may even incorporateinnovations first developed in the United States. Ifthe European nations and the United States areunable or unwilling to harmonize their defenseexport policies, then Congress may wish toconsider restricting future defense industrialcollaboration with Europe.

Continued transatlantic collaboration in militarytechnology will likely increase interdependence,both in terms of shared technology and with respectto production capabilities. Such interdependencewould deepen penetration of the U.S. market byforeign components and thereby increase U.S. de-pendence on foreign defense equipment and technol-ogy. Dramatic growth in strategic corporate alli-ances and subcontracting arrangements betweenU.S. and European defense companies indicate thisprocess is already under way (see figure 1-16).Recent acquisition of U.S. defense companies byEuropean fins, large defense cooperation staffs atthe European embassies in Washington, and market-ing offices of European defense firms inside theCapital Beltway also indicate increasing Europeanpenetration of the U.S. defense market.

European governments are unlikely to permit U.S.defense companies to establish a greater presence inEurope that does not entail reciprocal access forEuropean firms. Because the U.S. Government buysmore defense equipment than all of the major

42From 1980 ~ou@ 1987, tie Fr~~~h sold $6.7 bflfion (c~ent do~s) worth of adv~ced w~pons to I.rq, including 143 h!fkage F-lC @h@rS ~d734 AM-39 Exocet missiles. U.S. Arms Control and Disarmament Agency, World Military Expenditures and Arms Tran#ers, 1988 (Washington DC:U.S. Government Printing OffIce, 1989), p. 22.

Chapter I-Global Defense Business and Arms Proliferation ● 25

defense-producing states of Europe combined, it isunlikely that opening up transatlantic defensecollaboration and trade would benefit U.S. firmsin the aggregate, particularly in a decliningglobal defense market. Over the past several yearsthe defense industries of Europe have consolidated,creating national champions. These defense con-glomerates—such as British Aerospace (BAe) in theU.K. and Deutsche Aerospace (DASA) in Germany—are comparable to the larger U.S. defense contractorsin terms of financial resources, technology, produc-tion, and sales.

Finally, the transatlantic exchange of defensetechnology and the industrial linkages on which itdepends raise additional proliferation concerns.ultimately, the United States exerts very littleinfluence over the weapon systems and defensetechnology of even its closest allies. Increasinginternationalization of the defense industrialbase means that national controls over the distri-bution of defense systems and technologies be-come weaker. At some point in the weaponsdevelopment process, technology itself becomesfungible, that is, innovations of one companyworking closely with another contribute to thetechnology base and knowledge of both. It thenbecomes possible for either party to build on aparticular development, modify it for differentapplications (both military and civil), sell it inproducts to third parties, or transfer it as technologyto others. Proliferation of defense industry andtechnology to developing nations is discussed inIssue 3 below.

Issue 3: Transferring Defense Technology toDeveloping Nations

The developing nations depend far more heavilyon transferred defense technology than do Japan andthe Western European states. Chapters 7 through 11analyze the defense industries of seven nations:South Korea, Brazil, India, Taiwan, Indonesia,Singapore, and Australia. They indicate that li-censed production is a major vehicle for the promo-tion and building up of indigenous defense industrialcapabilities. While licensed production of compo-nents is far more common, several of the nationshave also undertaken extensive production of majorweapons systems in this way.43

Figure 1-16--U.S.-European Defense IndustrialCooperative Arrangements

35 T 33

Numberof teams

30

25

20

15

10

5

0 1

23

6 7

1986 1987 1988 1989

Year

SOURCE: Lt. Col. Willie E. Cole, Lt. Cd. Richard C. Hochberg, and Comdr.Alfred E. Therrien, Europe 1992:Cata/ystforChange in DefenseAcquisition: Report of the DSMC 1989-90 Military ResearchFellows (Washington, DC: Defense Systems ManagementCollege, 1990), p. 45.

Increasingly, U.S. industry transfers defense tech-nology to a wide range of developing nations on anad hoc basis in the absence of consistent policydirection. Congress faces a clear policy choice:whether or not (or to what extent) to permit U.S.companies to build up the defense productioncapabilities of the developing world. The principalconsiderations on which policy in this area might bebased are discussed below.

Licensed production and other forms of interna-tional collaboration in defense technology are criti-cal to building the defense industries of developingcountries. Many of these nations have very weakR&D capabilities in defense technology; and theadvanced technology and R&D resources they dopossess are usually dedicated to commercial efforts.Defense companies in South Korea, for example,typically depend on the government’s Agency forDefense Development (ADD) for most of theirR&D, and ADD itself has very limited R&Dfacilities and programs. The long-term strategy ofthe Korean Government is to draw U.S. defensecompanies into cooperative production and R&D

As~dia~ pr~uc~ 21 ~jor conventio~ weapon systems under license; South Kora 16; ‘hiwa~ 13; Brazil and kdonesia, 12 mck AUS~ZU10; and Singapore, 6.

Photo credit: U.S. Air Force

The F-5 fighter has been exported to 32 foreign nations andhas been manufactured in South Korea Taiwan, and

Switzerland.

relationships so that Korean firms can learn fromtheir more advanced partners.44

In the absence of significant foreign assistance,the indigenous defense industrial capability of mostof the developing nations would cease to expand andmight even collapse. While there is some evidencethat the developing nations are beginning to transferdefense technology among themselves, they are stilllargely unable to produce the technology or absorbthe costs associated with indigenous development ofmodern weaponry.45 Because domestic demand is solimited, most must find export markets to reduce theunit costs even for systems produced under license.For this reason, U.S. restrictions on third party salesof U.S. weapons produced under license is a majorissue for developing countries. They face the sameproblems of overcapacity and high developmentcosts that have plagued the advanced producers-only for them, the problems are more acute.

Industrial linkages between U.S. defense compa-nies and weapons producers in the developing worldhave expanded in recent years. Frequently, suchlinkages are built into the structure of arms sales.What used to be straightforward sales of majorplatforms have now become sales combined witheventual licensed production of all or part of the

weapon in question. These kinds of arrangementscontribute to globalization of the defense industrialbase. Global sourcing may already be makingdefense production more efficient, but in the longterm, it will also tend to displace U.S. defensesubcontractors (and U.S. workers) and increaseU.S. dependence on foreign-made defense prod-ucts.

.

Nations with developing defense industries havebrought about a significant expansion of worldwidedefense production capacity, which is not surprisingconsidering their growing technological and indus-trial presence in international civilian markets.These countries are now entering the internationalarms trade or have active strategies to do so. Some,like Brazil and Israel, have already made theirpresence felt, exporting (respectively) 90 and 55percent of their production (see figure 1-5); others,like South Korea, intend to supply a large portion oftheir own domestic needs as well as those of theirallies. Most will likely adopt a dual-use approach todefense technology, i.e., seeking to leverage civiliantechnology for defense purposes and producing highquality, but not state-of-the-art, weapon systems.

The United States is now engaged in and negotiat-ing transfer of advanced defense technology to avariety of developing countries (see figure 1-8).These include the M1A1 Abrams tank coproductionwith Egypt, the Korean Fighter Plane (a GeneralDynamics F-16 sale and licensed production ar-rangement), and the Indigenous Fighter Plane withTaiwan (a twin engine fighter based on F-16,F/A-18, and F-20 technology). While the UnitedStates cannot stop these nations from building theirown defense industries, U.S. policy on transferringdefense technology to them will make a very largedifference. Of the 16 major weapons systemsproduced under license by South Korea, for exam-ple, 12 were transferred from the United States; andU.S. companies licensed 9 of 13 major foreignsystems being produced in Taiwan. It is unlikely thatSouth Korea or Taiwan would have achieved theirpresent levels of defense production without signifi-cant and sustained assistance from U.S. defensecompanies (see table 1-6).

44For exmple, in tie proposed Kore~ Fi@ter Plane (KFP) projec~ an F-16 fighter COprOduCtiOn agreemen% Souti Kore~ ~dustry e@*rs ‘iUreceive training at research centers in the United States, and General Dynamics engineers will work in Korea to transfer the underlying technologies toKorean companies involved in the project. The Korean strategy is discussed inch. 8.

AS~ese conditions my c~ge b the future for countries as their defense industries mature and they gh experience b ~troduc@ Civflhinnovations into weapons systems, particularly in the field of defense electronics.


Some argue that turning off the U.S. spigot wouldnot solve the problem because the defense industrialbase is already global and other nations (particularlyin Europe) could provide the requested items.Clearly, U.S. controls on defense industrial collabo-ration (particularly licensed production and codevelop-ment) would not eliminate the flow of defensetechnology unless coordinated with other advanceddefense industrial states.

As the largest and most advanced producer ofdefense systems in the West, a U.S.-led diplomaticinitiative to restrict collaboration might slow thepace of defense industrial and technologicaldispersion. It would also place the United States ina position to exert diplomatic pressure on its NATOAllies and the Soviet Union. Working together, theNATO countries and the Soviet Union could stemthe vast majority, perhaps as much as 90 percent,of technology transferred in international de-fense trade (see figure 1-2 above). A possibleapproach is discussed below under Issue 4.

Global Trade in AdvancedConventional Weapons

The final two issues address the question: Whatare the key considerations of a policy to restrictor permit arms trade in major conventionalweapons? The Iraqi invasion of Kuwait and subse-quent events have focused world attention oninternational transfer (both sales and grants) ofadvanced weaponry. On one hand, the Bush Admin-istration has proposed major arms transfers, espe-cially to the Middle East; and the Department ofState and Defense Security Assistance Agency(DSAA) have argued to Congress that increasedforeign sales are necessary to maintain domesticproduction of important U.S. weapons systems.% Onthe other hand, the Persian Gulf War also appears tohave increased concern among policymakers and thepublic in the United States, Europe, and the SovietUnion that the proliferation of powerful advancedconventional weapons must be restrained. In France,the fact that French soldiers faced French weaponson the battlefield has catalyzed public opposition to

Table 1-6--Major U.S. Weapon Systems ProducedUnder License by South Korea and Taiwan

South KoreaF-16 Fighting Falcon fighter (negotiating)F-5E Tiger-2 fighterF-5F Tiger-2 fighterH-76 Eagle helicopterModel 500MD helicopterPL-2 light plane trainerM-101A1 105mm towed howitzerM-109-A2 155 self-propelled howitzerM-1 14-AI towed howitzerCPIC type fast attack craftLCU-1610 type landing craftPSMM-5 type fast attack craft

TaiwanF-5E Tiger-2 fighterF-5F Tiger-2 fighterF-5F Tiger-2 trainerModel 205 UH-1 H helicopterAIM-9J air-to-air missileAIM-9L air-to-air missileMIM-23B Hawk land mobile surface-to-air missileM-60-H main battle tankFFG-7 class frigatePL-1 B Chienshou light planeLung Chiang class fast attack craft


French arms export policies for the first time.47

These differing perspectives are likely to form thebasis of a major policy debate in the 102ndCongress.

Issue 4: The Future of Global Arms Trade

Two principal objections are offered to any U.S.policy to place additional restraints on internationaldefense trade. First, some defense industrialistscontend that international sales are important tosustain selected sectors of the U.S. defense indus-tries at present levels of production and capacity.Most industry analysts agree that U.S. Governmentprocurement will continue to fall,48 and that foreignmarkets, especially in the Middle East and theWestern Pacific, offer opportunities for growth.Proponents urge government to support or, at aminimum, permit expanded foreign sales to cushionthe effect of declining domestic procurement.

~~ese include tie MIAI Abrws ~ the Blackhawk helicopter, the MIM-23 HAWK suIfaCe-tO-ti mki.le, the F-16 Falcon fighter, tie M-64Apache attackhelicopter, andtheBoeing 707 aircraft, among others. Several of these were deployed effectively in the Persian Gulf Warandare scheduledto go out of production as early as 1993. See U.S. Department of State and U.S. Defense Security Assistance Agency, Congressional Presentation forSecurity Assistance Programs, fiscal year 1992, p. 6.

d7See The Washington Post, Apr. 6, 1991, P. A17.‘%ialomon Brothers, “Defense Industry Update-The 1992 Department of Defense Budget: Seventh Consecutive Year of Real Decline Is Cert@

Backlogs Will Fall,” Mar. 18, 1991.

28 ● G1obal Arms Trade

Many analysts argue, however, that contraction inthe defense industries is now appropriate, givensignificant overcapacity both in the United Statesand abroad. The expansion of the defense industriesin the 1980s apparently cannot be economicallysustained into the 1990s. As the potential forhostilities between the United States and the SovietUnion has diminished, large defense budgets havebecome unnecessary and politically unpopular. Inthis view, a smaller, more efficient defense industrialbase can meet the nation’s security needs in thepost-Cold War era.

The Persian Gulf War has provided support for theview that the United States and its allies mustmaintain a collective capacity to respond to large-scale military crises in distant lands. But at the sametime, the crisis confirmed the growing danger ofputting advanced weapons in the hands of govern-ments that may use them for nefarious purposes.Indeed, the proposed $21 billion sale of weapons tothe Saudis, and the recent requests by several otherMiddle East states for substantial arms transfers,take on the character of a self-perpetuating cycle.49

In this cycle, the United States, the Soviets, and theEuropeans must continue to make and export highvolumes of weapons to reestablish regional balancesof power upset by war or by the last round ofweapons sales.

The second argument against placing significantrestraints on international defense trade is thatunilateral action, while helpful, will be insufficientbecause the Soviets, Europeans, and other producersof advanced arms would make the sale. Defenselobbyists argue that U.S. industry lost an enormousopportunity when Congress blocked the sale of F-15fighters to Saudi Arabia in the mid-1980s. As analternative, the Saudi Government bought between25 and 30 billion dollars’ worth of defense equip-ment from British companies in the Al Yamamahagreements of 1986 and 1988. In a worst-casescenario, unilateral U.S. action to eliminate foreignmilitary sales might strengthen the competition atthe expense of U.S. defense companies, perhapsaccelerating a loss of U.S. leadership in a range ofdefense technologies.

However, U.S., European, and Soviet policymakersare indicating anew willingness to consider restraint

Photo credit: U.S. Navy

The United States agreed to transfer advanced F/A-18(above) fighter technology to South Korea After 2 years of

negotiations, the South Korean Government decidedto produce the F-16 instead.

in arms sales to the Middle East, because of the roleof foreign arms in the Persian Gulf War and themassive military effort that became necessary todefeat them. In defense trade, governments can exertstrong regulatory controls because government isoften the only buyer, helps to finance R&D andproduction costs through progress payments, andhas the ability to regulate the output and distributionof the product. If the goal is to reduce theproliferation of potent weapons, it can be ap-proached as a matter of public policy throughconcerted multilateral action by the United Statesand other nations with similar interests.

Congress could enact stricter unilateral controlsthrough modification of the congressional approvalprocess for foreign military sales and reform of thearms transfer process (Issue 5, below). But this kindof action does not address the fundamental problem-that buyer nations can draw on diverse sources fordefense equipment and technology, and that thenumber of such sources is increasing. The process ofcreating new centers of defense industry (throughincreased technology transfer and coproductionarrangements) will deepen this trend if it continuesin the future.

With these findings in mind, Congress may wishto charge the Executive to set up a blue-ribboncommission to develop a U.S. strategy for multi-lateral agreements on weapons trade and collabo-

@At this writ@ $9.2 billion k- triinsfershas been authorized. As of Feb. 28, 1991, further sales were postponed pending cwlcationmdr~ewof the political and military situation in the Persian Gulf.


ration-considered in light of U.S. foreign policyinterests and global political stability in a newmultipolar world. Such a commission would reportits findings to Congress and to the President foradditional consideration. Congress may also wish toconsider the option of mandating that such acommission explore the benefits and risks to theNation of entering into multilateral talks, perhapsinitially limited to the major arms-exporting nationsof Europe, the United States, and the Soviet Union.These nations account for approximately 81 percentof all arms transfers (see figure 1-12).

The Persian Gulf situation offers some usefullessons. First, the $2.7 billion in advanced weaponspurchased by Kuwait were of little use in defendingthat nation, and some ultimately fell into enemyhands. Second, the United Nations Security Councilmoved quickly and effectively to censure and enactsanctions against Iraq as a renegade nation unwillingto live by accepted standards of international con-duct. And finally, the end of the Persian Gulf Warmay improve the opportunity for a comprehensiveMiddle East peace settlement, perhaps includingmultinational regulation of defense trade and collabora-tion conducted within the region.

As President Bush has suggested, the end of theCold War offers the possibility of “a new worldorder, where diverse nations are drawn together incommon cause to achieve the universal aspirationsof mankind: peace and security, freedom, and therule of law. ”50 In this spirit, a congressionallymandated commission could explore the implica-tions of establishing international agreements andinstitutions to limit proliferation of advanced de-fense equipment and technology.

In the absence of an institutional mechanism toadvocate restraint, however, it is extremely difficultand perhaps impossible for the Executive to resistthe use of arms transfers to further its foreign policyagenda. The U.S. Government maintains an exten-sive bureaucracy in the Bureau of Politico-MilitaryAffairs at the State Department, its embassies, theDefense Security Assistance Agency, the DefenseTechnology Security Agency, and elsewhere, whosepurpose is to conduct international trade in armssuch that: 1) the foreign policy agenda of thePresident is promoted and 2) regulation and appro-

priate security is exercised over the export of defensesystems and technology.

Although extensive guidance for arms transfers isprovided through the Arms Export Control Act andrelated legislation, Congress has not altered thefundamental principle that it is the policy of theUnited States to sell, grant, and otherwise trans-fer large quantities of advanced weapons to othernations. Perhaps more emphasis should be placedon curtailing international arms transfers throughmultilateral agreements as part of a larger strategy topursue objectives that contribute to greater worldmilitary and political stability.

Issue 5: Reform of the Arms Transfer Process

There are a number of steps that Congress couldtake to make the arms transfer process moretransparent and accountable for oversight and regu-latory purposes.

For example, Congress could change the way inwhich military assistance, including coproductionand codevelopment, is considered in the authoriza-tion and appropriations process. At present, securityassistance programs are viewed as an aspect offoreign assistance in the international affairs budget.There is, accordingly, a general understanding thatassistance will be extended to allies and others insupport of U.S. foreign policy goals. However,because security assistance programs cause prolifer-ation of potent weapons and of defense industrialcapabilities, they exert effects on internationalrelations that extend far beyond the immediatesupport of U.S. allies and fiends. Formally sepa-rating security assistance from foreign aid pro-grams in the legislative process would helpCongress to weigh the costs and benefits of eachto the United States.

Another means of achieving better visibility forcongressional oversight would be to require theBureau of Politico-Military Affairs to report regu-larly on the proliferation of conventional defensetechnology and industry, including a regional as-sessment of the relative capabilities of differentnational defense industries. Congress could alsorequire a “proliferation impact statement” toaccompany all proposed arms transfers above aspecified dollar threshold. In addition, Congresscould require DSAA to include an evaluation and

m~esident George Bush “State of the UniOn Message,” Jan. 29, 1991. Reprinted in The New York Times, Jan. 30, 1991, p. A12.

30 ● Global Arrns Trade

quantitative analysis of collaborative v. off-the-shelfforeign military sales in the annual CongressionalPresentation Document. For major collaborativeprograms, the Arms Control and DisarmamentAgency could also be required to evaluate the extentto which collaboration enhances the defense indus-trial capabilities of the recipient nation relative to itsneighbors or some other standard.

If Congress wishes to assure that the proliferationaspects of large arms transfers are given greaterconsideration, it could establish a high-level non-proliferation office, perhaps in the Bureau ofPolitico-Military Affairs or in connection withthe National Security Council. The purpose ofsuch an office would be to review all pending armssales to determine-perhaps on a case-by-casebasis-the degree to which the sale would contributeto proliferation and whether it would increase thelikelihood of political instability or otherwise dam-age U.S. interests according to legislatively speci-fied criteria. If the office found the sale not to be inthe national interest, it could be charged to make thatcase to the President as a part of the public record.

Congress could make security assistance pro-grams more accountable by reforming the congres-sional approval process for arms transfers. Byseparate legislation, Congress could require thatall arms sales above a specified dollar thresholdbe approved by a vote of both houses, thusreversing the present process where a sale can bedisallowed by the same procedure. A potentialproblem is that Congress might then have to bringeach of 120 to 130 major sales per year to a floorvote, a cumbersome and impractical process. Avariation on this procedure would be to batch thedifferent arms sales according to status of therecipient, sophistication of weapons, regional con-siderations, volume of sales, or some combination ofcriteria. In this way the legislative burden of theapproval process could be reduced.

In recent years, the number of direct commercialsales (DCS) as opposed to foreign military sales(FMS) has increased significantly (see figure 1-11).Congress may wish to take steps to expose DCStransfers to the same level of scrutiny as FMStransfers. Congress may also wish to prohibit DCS

transfers on the grounds that such sales promotedirect international linkages between U.S. compa-nies and foreign firms and their governments, andare not subject to the full regulatory review processthat Congress has mandated for FMS. If Congresswishes to slow the pace of the internationalizationof the defense technology and industrial base,providing disincentives for DCS transactionswould be a useful point of departure.

Congress could also change the informationcollecting and processing structure that results in apattern of specific requests by other countries forarms. Currently, approximately 950 DSAA fieldstaff members work closely with host countrymilitary and diplomatic personnel to design securityassistance packages that are likely to meet both theneeds of the host country and the political require-ments at the State Department and within DSAA(see table 1-7). In addition, DSAA maintains sepa-rate organizations in 56 foreign countries.51 BecauseDSAA field staff are promoted according to howeffective they are in arranging and managing secu-rity assistance programs in specific countries, theyhave a career interest in promoting sales andtransfers of U.S. weapons.

Congress could change this incentive structure bymaking the determination of security assistanceneeds a stand-alone function, to be performed bystaff who are not involved in the implementation ofthe program. It might even be desirable to separateout the determination of needs bureaucratically. Thiscould be done by making the Arms Control andDisarmament Agency, or some other State Depart-ment office, responsible for evaluating securityassistance needs of recipient countries, both in termsof equipment and industrial capability. This evacuat-ing group might have its own field staff to reviewweapons transfer requests earlier in the process.

Each year approximately 80 percent of DSAA’Soperating budget is financed through a 3-percent feethat DSAA charges over and above the cost of theweapons that it procures and then transfers to foreigngovernments. This self-financing fee has amountedto an average of approximately $330 million per yearover the past 5 years.52 Because the operatingbudget of the agency is tied to the volume of weap-

SIU.S. ~p~ent of Stite andu.s. Define Seeurity Assistance Agency, Congressional Presentation for Securi~Assistance program, fiscal Y=1991, p. 49.

SzThis fi~e is deriv~ from data provided by the Defense Security Assista.uw Agacy.

Chapter l--Global Defense Business and Arms Proliferation ● 31

Table 1-7—DSAA Field Staff, 1989-92

1991 19921989 1990 (estimated) (proposed)

Africa . . . . . . . . . . . . . . . 69 66 64 60American Republics . . . 195 190 202 204East Asia and Pacific . . 249 245 239 239Europe and Canada . . . 191 173 157 158Near East and

South Asia . . . . . . . . . 265 261 251 251Total ... , . . . . . . . . . . 969 935 913 912

SOURCE: U.S. Department of State and U.S. Department of Defense,Defense Security Assistance Agency, “Congressional Presen-tation for Security Assistance Programs, Fiscal Year 1991 ,“ pp.53-54, and U.S. Department of State and U.S. Department ofDefense, Defense Security Assistance Agency, “CongressionalPresentation for Security Assistance Programs, Fiscal Year1992,” pp. 51-52.

ons transferred, there is a powerful incentive forDSAA personnel to make as many sales aspossible, consistent with the law and the policydirection and review it receives from the StateDepartment, White House, and Congress. Congresscould reduce or eliminate DSAA’S self-financingmechanism, thus removing the incentive to maxi-mize sales. At the same time, it would force theDSAA operating budget to come out of generalappropriations, increasing congressional visibilityand control over the agency’s activities.

* * *

There is an emerging consensus that action by anycountry alone to stem the proliferation of modernweapons and technology is likely to fail. There aretoo many sources of supply, and for most weaponssystems, alternative sources are available. Thissituation is partly a consequence of past U.S. policyon collaborating with our allies and friends in theproduction of weapons systems. It is also due, inpart, to the liberal defense export promotion policiesof our European allies. As a result, we are seeingtoday the emergence of an increasingly internationaland interdependent defense industrial structure inthe West.

That structure is anchored in a complex set ofstrategic corporate linkages between U.S. defensecompanies and their counterparts in the advancedindustrial states of Europe and Asia (see table 1-2and figure 1-16). It is now being gradually extendedto numerous developing nations, including Brazil,Taiwan, South Korea, India, Turkey, Indonesia,Singapore, Australia, and others. The result is loss ofcontrol over the dispersion of defense technologythrough the continuous development of new centersof increasingly capable defense industry around theglobe.

Global Defense Business and Arms Proliferation

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