Proposed FMS Deals in 1997 Reflect Tight Markets, Economic Woes

By Wade Boese

During 1997, the Department of Defense notified Congress of requests from 18 countries for military equipment and services worth $10.6 billion. These requests came through the Pentagon's Foreign Military Sales (FMS) program, which conducts U.S. government-to-government military sales. The proposed deals, $1.3 billion less than in 1996, reveal a continuing demand for equipment upgrades and support services, a steady market for air-to-air and anti-ship missiles, and limited purchases of "big ticket" conventional weaponry.

Asia's economic crisis will likely forestall any increase in the amount of advanced conventional arms purchased for the near future as some states in the region, which only recently was considered to be the next major arms market, alter their procurement plans. South Korea has already delayed its 1997 request for four Airborne Warning and Control Systems (AWACS) surveillance aircraft and related support services valued at $3 billion. Facing a contracting global arms market, which has dropped from a Cold War high of $73 billion in 1985 to $32 billion in 1995, according to the latest edition of World Military Expenditures and Arms Transfers, published by the Arms Control and Disarmament Agency (ACDA), U.S. defense manufacturers are exploring new markets for 1998 and beyond.

Under the Arms Export Control Act, Congress must receive notification of proposed FMS, which currently account for a majority of U.S. arms transfers, and commercial sales if the equipment is identified as "major defense equipment" on the U.S. Munitions List and the value of the deal is $14 million or more. Congress has 30 days (15 in the case of NATO members, Australia, Japan and New Zealand) to block a sale with a joint resolution of disapproval, but it has never successfully used this authority. Notified FMS deals do not always result in finalized transactions and there can be a substantial delay between notifying Congress and signing an agreement.

Proposed 1997 FMS Deals

Ten states (Egypt, Greece, Israel, Italy, Japan, Kuwait, South Korea, Taiwan, Turkey and the United Arab Emirates) requested various types of missiles, torpedoes and missile systems totaling at least $1.4 billion in 1997. Other demands for advanced conventional weaponry included Kuwait's appeal for 16 Apache attack helicopters, Taiwan's bid for 21 Super Cobra and 13 Kiowa Warrior attack helicopters and Thailand's request for 107 M60-A3 tanks.

Nearly $3 billion (28 percent) of the proposed FMS deals involved states seeking upgrades and training and support services. France, Japan and Saudi Arabia requested equipment to upgrade their reconnaissance and surveillance aircraft, while Bahrain, Portugal and Singapore asked for modification kits and support services for their F-16 fighter aircraft. Both South Korea and Taiwan requested the establishment of supply arrangements to acquire spare parts for their aircraft. Taiwan also asked for, as did the Netherlands, training for their F-16 fighter pilots.

Impact of Asia's Economic Woes

Arms exporters recently viewed Asia as the market with the most growth potential as East Asia's arms imports alone rose to $6.4 billion in 1995, an increase of 50 percent from 1993, according to the ACDA report. Moreover, the most recent Congressional Research Service report, Conventional Arms Transfers to Developing Nations, 1989-1996, shows that Asia (all regions) accounted for 33.6 percent ($28 billion) of all arms agreements from 1993 to 1996.

Initially, the proposed 1997 FMS deals showed that the Asian market appeared to be meeting expectations as Asian states requested $5.9 billion worth of equipment, while Middle East states sought equipment totaling $3.5 billion. However, South Korea's postponement of its AWACS purchase and decisions by Indonesia, Malaysia and Thailand to delay or revise procurement plans indicate that the Middle East will likely remain the largest arms market for the near future.

Thailand's announcement that it could not meet payments for eight F/A-18C/D aircraft, signed for in 1996, generated immediate concern for the Pentagon. A special team traveled to Bangkok on January 28 to evaluate three possible options for Thailand: stretching out payments, canceling the sale or finding a third buyer. No solution has been announced, but Secretary of Defense William Cohen stressed during his 12-day, seven-nation trip to Asia in January that Washington was encouraging U.S. companies "to be as flexible as they possibly can in order to accommodate the needs of our very strong partners."

The United States is not the only supplier experiencing setbacks in Asia, as Indonesia delayed its purchase of 12 Su-30K fighter aircraft and eight Mi-17 transport helicopters from Russia. The deal, announced on August 5, 1997, after Indonesia canceled a U.S. fighter buy in June because of human rights criticism from Congress, was reportedly worth more than $500 million in cash and consumer goods.

Despite continued hostility between Greece and Turkey, the U.S. State Department authorized American companies to compete for arms sales to both states. On December 5, the State Department granted McDonnell Douglas a marketing license for flight demonstration tests of its F-15E fighter to Greece, which is seeking approximately 40 aircraft. Lockheed Martin's F-16 was previously granted the same authorization, but the F-15E, which no other NATO ally possesses, is of more concern because of its greater range and ground attack capability.

Nearly three weeks later, Secretary of State Madeleine Albright on December 23 decided to allow Bell Helicopter's AH-1W Super Cobra and Boeing's AH-64D Apache to participate in Turkey's competition for 145 attack helicopters. In February, Turkey subsequently expressed its interest in acquiring F-15E fighters.

State Department Deputy Spokesman James Foley has said in both cases that the decision to allow U.S. companies to contend fr the sale does not guarantee that if a U.S. company wins, the sale will go forward.

Potential Markets

President Clinton paved the way for U.S. companies to seek new clients in Latin America last August with his reversal of a 20-year policy of restraint on U.S. sales of advanced conventional weaponry to the region. In response to Clinton's decision, 27 current heads of state and 14 former heads of state in the Western Hemisphere have called for a two-year moratorium on arms purchases by Latin American states. Clinton pledged his support, but conditioned it on the signature of all the region's current heads of state. Although no Latin American states have purchased U.S. equipment previously denied, Chile is expected to announce the winner of its competition for approximately 20 fighters this spring.

Early expectations that the expansion of NATO would result in immediate sales of advanced equipment have been tempered by economic realities. A combination of lack of desire by current NATO members to pay for enlargement and the budgetary limitations of the Czech Republic, Hungary and Poland (all of whose defense spending as percent of gross domestic product falls below the NATO average of 2.8 percent) have prompted a reorientation of priorities. The three remain interested in purchasing advanced fighters, at least a total of 150, but will first seek the command, control and communications equipment necessary to ensure basic interoperability with NATO.

Unless Asia quickly rebounds and Eastern Europe generates greater purchasing power, future sales are likely to remain similar to the last couple of years. A U.S. government official familiar with arms control issues observed that "sometimes economic limitations are the best form of arms control."