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economies of scale not available to

defense exporters are "on the same footing"

their competitors. The U.S. defense

in terms of their treatment by the U.S. gov-

research and development budget is

ernment. A cursory look at the facts suggests

five times that of all Western Euro-

that the answer is a resounding no. There are

pean countries combined, which

no other commercial enterprises that receive

ensures that U.S. weapon systems are

the massive R&D and procurement contracts

and will remain technologically supe-

that arms manufacturers receive. Unlike

rior to those of other suppliers. The

many weapons producers, no commercial

military and political ties with the

firms receive free or low-cost production

United States associated with the

equipment and facilities from the govern-

sales are also an important benefit to

ment. And only the arms industry receives

many foreign countries.33

$7.9 billion per year in grants, subsidized

loans, and promotional support to help sell

The Congressional Budget Office's argu-

its wares on the international market.

ments against repealing R&D recoupment

Considering those massive subsidies to

charges could be applied equally to a new tax

weapons manufacturers, granting additional

break that is being sought for U.S. weapons-

tax breaks to an industry that is being so

Major contractors

exporting firms in Rep. Sam Johnson's

pampered by the U.S. government makes no

often receive

(R-Tex.) "Defense Jobs and Trade Promotion

sense. As the Presidential Advisory Board on

Act of 1999." Johnson's bill, which has the

Arms Proliferation Policy recommended, a

government-

strong support of the Aerospace Industries

top priority of U.S. arms export policy should

built plants and

Association, would permit weapons-export-

be to "support the goal of reducing or elimi-

equipment at

nating subsidies on a global basis."36 Changes

ing firms to set up foreign sales corporations.

The corporations would allow U.S. arms

in policies on recoupment fees or the tax

little or no cost

companies to shield a portion of their export

treatment of arms sales should be dealt with

through govern-

profits from U.S. taxes. The tax benefit would

as part of a larger review of U.S. government

ensure that U.S. firms would not be at a dis-

subsidies for military exports.

ment-owned,

advantage compared with European arms

company-

Financing and Aid Programs of Other

companies, which pay a value-added tax on

operated

Government Agencies

goods sold domestically but are not taxed on

their exports. The Aerospace Industries

In addition to Pentagon programs, other

facilities.

Association estimated that taking full advan-

agencies provide subsidies for sales of

tage of foreign sales corporations could save

weapons.

its member companies 15 to 30 percent of

Economic Support Funds: Indirect Subsidies for

the current federal tax burden on their export

Arms Exports. After the Pentagon's FMF pro-

profits--a move that the Congressional Joint

gram, the second-largest stream of subsidies

Committee on Taxation estimates could

for U.S. arms makers and their clients comes

result in $350 million in lost tax revenues

from the ESF program. The program is

over the next five years.34

administered by the Agency for International

Development and funded out of the interna-

Furthermore, asserting that "putting

tional affairs budget (which is distinct from

defense and non-defense companies on the

the Pentagon budget). ESF, which has been

same footing would encourage defense

funded at over $2 billion per year throughout

exports that would promote standardization

this decade, provides to major U.S. security

and interoperability of equipment among

partners cash assistance, financing for

our allies," Deputy Secretary of Defense John

imports of commodites, and a small amount

Hamre has supported Johnson's approach.35

of funding for specific projects. Because 90

Like recoupment fees, the fundamental issue

percent of ESF funding goes to major

raised by Representative Johnson's bill is

importers of U.S. arms, such as Israel, Egypt,

whether--as Hamre put it--defense and non-

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