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ARMS TRADE RESOURCE CENTER REPORTS
- Welfare for Weapons Dealers 1998: For further
information: The Hidden Costs of NATO Expansion A World Policy
Institute Issue Brief Acknowledgments
The Center would like to thank the following foundations and individuals for supporting its work on the costs and consequences of the conventional arms trade: the Compton Foundation, the HKH Foundation, the Ruth Mott Fund, the Ploughshares Fund, Rockefeller Family Associates, the Samuel Rubin Foundation, and Margaret R. Spanel. This report also draws on the preliminary findings of the Center's project on the changing dynamics of arms production and trade, which is being supported by the Ford Foundation and the John D. and Catherine T. MacArthur Foundation. Research on campaign spending and lobbying by arms contractors is drawn from the Center's ongoing "Peddling Arms, Peddling Influence" project, which has received grants from the CaReth and W. Alton Jones Foundations. Table of Contents
II.
Welfare for Weapons Dealers: NATO Subsidies Spur Increase III.
Fact Versus Fiction on NATO Costs: The Incredible Shrinking Estimate
IV.
Desperately Seeking Subsidies: Arms Industry Lobbying List of Tables:
I.
Introduction Unfortunately, far from reducing corporate welfare for weapons dealers, Clinton Administration policy has been to increase it. And if the plan to expand NATO to include Poland, Hungary, and the Czech Republic is ratified by the Senate this spring, these subsidies are likely to grow even more rapidly. U.S. taxpayers could end up spending tens of billions of dollars over the next decade and one-half to support the arming of new NATO members. And, as will be demonstrated below (see section III), these increases in military aid are just the tip of the iceberg: the U.S. share of a full-blown NATO expansion initiative -- including military exercises and troop deployments, modernizing military bases and communications networks, and rearming the nations of East and Central Europe -- could reach $250 billion between now and the year 2010.
II.
Welfare for Weapons Dealers: NATO Subsidies Spur Increase
Total U.S. government subsidies for weapons exports for 1996/97 averaged over $7.8 billion per year, an increase of 3% over 1995 levels and 11% over 1994 levels (see Table I, page 4).[3] The majority of these programs are already being used to underwrite sales of U.S. military equipment to potential new members of NATO, and there is strong evidence to suggest that the NATO connection will drive the costs of these programs sharply upward in the years to come. A brief description of each program and its role in financing NATO expansion follows.
Pentagon
Grants: In all, 19 potential NATO members are receiving FMF financing -- including current invitees Poland, Hungary, and the Czech Republic; potential future members such as the Baltic States, Bulgaria, and Romania; as well as ex-Soviet Republics such as Kazakhstan, Turkmenistan, and Uzbekistan that reach far beyond Eastern Europe. In all, these 19 countries will receive at least $154.7 million in FMF financing during F.Y. 1996-1998, for an average of over $50 million per year. These funds are being drawn from the $190 million in FMF financing that has been allocated to the Partnership for Peace (PFP) program for F.Y. 1996-98. The Clinton Administration's F.Y. 1998 foreign aid submission to Congress makes it clear that these PFP monies are specifically designed to "prepare countries for NATO membership" by supporting "acquisition of NATO compatible equipment." As such, this aid should be considered a cost of NATO expansion.[5] The FMF funds targeted for potential NATO members are relatively small now, accounting for less than 2% of the total FMF budget for F.Y. 1996/97, but they are likely to expand dramatically as NATO increases its membership beyond the first three new invitees and these funds are drawn upon to help U.S. weapons manufacturers sell their wares to these cash-strapped nations. The use of FMF funds to subsidize NATO growth will either put pressure on the levels of U.S. military assistance received by Egypt and Israel, or it will push FMF financing well beyond the $3-$4 billion in annual loans and grants that have been issued throughout this decade.
Pentagon
Loan Programs: The first new loan program, the Central European Defense Loan Fund (CEDL), has been allocated $20 million per year in FMF funding for F.Y. 1997-98 to support $647.5 million in loans to "assist in the gradual enlargement of NATO by providing FMF loans to creditworthy Central European and Baltic States for acquisition of NATO-compatible equipment."[6] As a result, FMF loans targeted toward NATO expansion have rapidly increased, from zero in F.Y. 1996 (when the FMF loan program totaled $544.1 million) to 44.8% of the $540.1 million in FMF loans authorized for F.Y. 1997 to 61.24% of the $657 million in FMF loans authorized for F.Y. 1998.[7] The second Pentagon loan program that is available to underwrite NATO expansion is the Defense Export Loan Guarantee program (DELG), which is authorized to provide U.S. government guarantees for up to $15 billion in loans for the export of U.S. military equipment. The DELG -- which was created in 1995 after a seven-year lobbying campaign by major military contractors like Lockheed Martin and trade associations like the Aerospace Industries Association -- offers guaranteed loans on sales of U.S. military equipment to 39 countries, including 10 nations in East and Central Europe. At a June 1997 seminar designed to familiarize bankers and weapons industry executives with the program, Deputy Undersecretary of Defense for International and Commercial Programs Page Hoeper underscored the DELG's potential role in financing NATO growth: "We see a tremendous opportunity in using this facility to help ease some of the financial and cash flow burdens of enlarging NATO." The events of 1997 have borne out Hoeper's statement. The first loan authorized under the program was a commitment of $16.7 million to Romania toward the purchase of pilotless drones (Shadow 200 Unmanned Air Vehicles from the U.S.-based AAI Corporation). In addition, a program spokesperson has indicated that of the $2.4 billion in requests for possible loans under the DELG program made thus far there has been a "disproportionate interest" from nations in East and Central Europe.[8]
This heavy reliance on U.S. government guaranteed loans as the "subsidies of first resort" for potential NATO members may minimize the short-term costs of NATO expansion by limiting direct budgetary outlays, but the checkered history of U.S. arms export loan programs suggests that this approach could be extremely costly in the longer term. During this decade alone, the U.S. government has written off or forgiven $10 billion in loans for military-related exports, including $7 billion in arms sales loans to Egypt and $2 billion in guaranteed loans for militarily useful technology to Iraq. As noted in Table I, over time the costs of these bad arms loans have averaged out to $1 billion per year.[9] And this pattern of bad loans is not likely to end any time soon. As of the end of F.Y. 1996, the Pentagon had $14.2 billion in direct and guaranteed loans outstanding to 38 countries, of which there was $244.9 million in payments in arrears on the principal plus a rescheduling of loans worth an additional $597.7 million. Among the major debtors under these Pentagon loan programs are countries like Liberia, Somalia, Sudan, and Zaire, which have recently been engaged in costly and devastating civil wars. The chance that these countries will repay their arms sales loans in full is slim, to put it mildly. Indonesia and the Philippines, who are also major deadbeats their U.S. arms loans, have been hit hard by the Asian currency crisis.[10] Given the recent record on U.S. arms export loans and the shaky financial position of many of the likely future customers, it is fiscally irresponsible to launch programs like the Central European Defense Loan Program and the Defense Export Loan Guarantee program which, if fully utilized, could double the amount of U.S. taxpayer-backed military debt outstanding. Floating billions of dollars of subsidized loans to potential NATO members in East and Central Europe for weapons they could not otherwise afford could be a recipe for financial disaster. One NATO aspirant, Romania, has already fallen afoul of International Monetary Fund (IMF) budgetary guidelines with a massive plan to purchase $1.4 billion worth of Cobra attack helicopters from Textron's Bell helicopter unit. The deal has been shelved for the moment due to IMF concerns, but both the company and the Romanian government are seeking creative financing mechanisms to revive the sale, which would involve production of Cobras in Romania for re-export, under a new name -- the Dracula.[11] A Congressional Budget Office estimate of the costs of modernizing the forces of Poland, Hungary, the Czech Republic, and Slovakia to bring them up to NATO standards found that these nations would have to increase their funds devoted to procurement of new weapons systems to six times current levels, a cost that CBO suggests "might be difficult for those nations to afford." Or, as former Czech Defense Minister Miroslav Vacek recently told Thomas Friedman of the New York Times, "For the NATO alliance the Czech Army cannot mean anything in its current condition, and I doubt we will have the economic growth in the coming years to pay for upgrades."[12] To the extent that this "affordability gap" is bridged through Pentagon loan programs like DELG and CEDL, the ultimate financial risks of a NATO-related military buildup in East and Central Europe will be borne by U.S. taxpayers. There are already troubling signs that these loan programs might be restructured in a way that would increase the danger of default. In the case of the DELG program, the Aerospace Industries Association has already been lobbying for a relaxation of the normal procedures for determining exposure fees on U.S. government-backed loans; if they are successful, DELG loans will be riskier, and the likelihood of taxpayer funds being tapped to cover shortfalls in the program's reserve funds will be much higher. As for the CEDL, early warning signs suggest that the Pentagon may not be establishing adequate reserves to cover bad loans. For F.Y. 1998, the Department requested $20 million to serve as a reserve fund for $402 million in arms export loans to East and Central Europe or a 1 to 20 ratio of reserve funding to loan commitments; by contrast, the Pentagon proposed setting aside $46 million in appropriated funds to serve as a reserve for $297.5 million in military loans to Greece and Turkey, a ratio of roughly 1 to 5. Are countries like Romania, Poland, the Czech Republic, Lithuania, and the other East and Central European nations eligible for the CEDL really that much less of a financial risk than NATO members like Greece and Turkey, or have the figures been twisted in favor of the new potential alliance members out of political expediency? Members of Congress and the public should demand more information on the terms of these new loan programs now before additional commitments are made: otherwise the DELG and the CEDL could sow the seeds for billions of dollars in bad arms-export loans in the years to come. Sen. Paul Sarbanes (D-MD) has sarcastically described the Pentagon's ability to stretch $20 million to cover $402 million in loans as "close to a miracle." Due to continuing concerns about the CEDL, the conference report on the F.Y. 1998 foreign aid bill contains language noting that "the conference managers are extremely concerned that the Administration has apparently abandoned its longstanding credit criteria for determining eligibility for the FMF loan program" and calling for a report to Congress "specifically detailing Administration FMF loan policy and credit risk criteria."[13]
Pentagon
Weapons Giveaways: Evaluating the costs of these weapons giveaways is a complex undertaking, but a conservative estimate of the program costs for F.Y. 1996 -- the most recent year for which full statistics are available -- puts the price tag at $750 million. This includes the $494.9 worth of weaponry that was offered to 38 countries under the Excess Defense Articles (EDA) grant program, plus a 20 percent allowance for routine undercharging on the $270.5 worth of weaponry that was sold to 23 countries under the EDA sales program (for an additional $55 million in subsidies), plus more than $200 million in weapons given away under the President's emergency drawdown authority (a discretionary military aid program authorized under Section 506 of the Foreign Assistance Act).[15] The Excess Defense Articles program has already become an important channel for assisting the military forces of potential NATO members. As of F.Y. 1998, a dozen East and Central European nations have been authorized to receive U.S. weaponry for free under the EDA program (many of them for the first time): Albania, Bulgaria, the Czech Republic, Estonia, Macedonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, and Slovenia. During F.Y. 1996, the Pentagon offered weapons worth at least $85 million to countries in the region, but this figure will move sharply upward now that more potential NATO members have been made eligible for grants under the program. EDA transfers to the region to date have included hundreds of military cargo trucks and 3 MK III patrol boats for Albania, an offer of C-130 cargo aircraft for Bulgaria, and more than 330 military trucks for Estonia. These shipments are likely to be just the beginning of a flood of surplus weaponry flowing to the region: the Clinton Administration's foreign aid presentation to Congress for F.Y. 1998 was chock full of references to the need for EDA grants to countries such as Albania, the Czech Republic, Hungary, Poland, Slovakia, and Slovenia to promote "interoperability with NATO," thereby making it clear that such weapons giveaways are yet another avenue for subsidizing NATO growth.[16]
Pentagon
Leases of U.S. Military Equipment:
Economic
Support Funds: An Indirect Subsidy for U.S. Weapons Exports
To date, potential NATO members in East and Central Europe have not been recipients in ESF aid, relying instead on the Support for East European Democracy (SEED) fund, which provides support for "economic restructuring, democratic transition, and social stabilization" in the region. Unlike ESF, it appears that the SEED program is not a disguised form of military assistance. Unfortunately, SEED grants were decreased by 19 percent from F.Y. 1996 to F.Y. 1997, and countries like Estonia, the Czech Republic, and Slovenia have seen their grants reduced to zero as they have already "graduated" from the program.[19] As NATO expansion proceeds, genuine economic assistance programs like SEED are likely to be squeezed even further to make way for more military aid to potential alliance members. As the Clinton Administration's own foreign aid submission to Congress points out, military assistance to both new NATO members and NATO "wannabes" is slated for a priority claim on foreign aid resources: The approach of NATO enlargement creates a special need for enhanced support for those countries seeking NATO membership. It is clear that those countries which will be invited to open accessional talks need substantial assistance to make their military forces interoperable with alliance forces. Increased grant assistance must therefore be available to these countries, bolstered in the case of creditworthy countries by FMF loans. For those countries that desire to join NATO but will not be a part of the first accession, the need for enhanced assistance is equally critical . . . to prevent any sense of a security vacuum.[20]
Military-Related
Loans by the Export-Import Bank: The biggest military-related loan guaranteed by ExIm during 1996/97 was a $90 million loan to Romania to finance the purchase of five Lockheed Martin FPS-117 radar systems. Because transport and communications projects that fit ExIm's "dual use" definition will be an important part of NATO expansion, ExIm loans are likely to be utilized as yet another important avenue for subsidizing the growth of the alliance.[21]
Arms
Export Promotion by Government Personnel at Pentagon, State and
Commerce:
The
Pentagon:
The
State Department:
The
Commerce Department: The sum total of personnel and resources devoted to arms-export promotion by the Pentagon, Commerce, and State Departments during 1996/97 was $410 million per year, representing an arms sales promotion work force of more than 6,300 employees. This is a slight decline from the comparable figures of $450 million and 6,500 employees for 1995. These figures do not account for the costs of Pentagon involvement in overseas air and weapons exhibitions (see below), nor do they account for the value of the time devoted to arms export promotion by top U.S. officials such as the Secretaries of State, Commerce, and Defense, not to mention President Clinton and Vice President Gore. From President Clinton calling the leader of the United Arab Emirates to urge him to buy Lockheed Martin F-16 combat aircraft to Vice President Gore writing to Kuwaiti officials to "reiterate my strongest support" for the purchase of howitzers from the U.S.-based United Defense company, the Clinton Administration's willingness to put top officials to work on behalf of U.S weapons manufacturers has been unprecedented. James Blackwell of Lockheed Martin has applauded these efforts, arguing that "the [Clinton] Administration has been far superior in supporting the aircraft industry at every level. In the past, we didn't get help." It is hard to put a price on the time of the President or his top Cabinet members, but it's clear that their promotional efforts on behalf of U.S. weapons makers have a cost to U.S. taxpayers. For example, one of the goals of Defense Secretary William Cohen's tour of Asia in January 1998 was to shore up U.S. arms deals that have been threatened by that region's financial crisis. Cohen's itinerary included a visit to Thailand to renegotiate the terms of a $400 million sale of Boeing F/A-18s to that nation. An official traveling with Cohen suggested to the New York Times that the defense secretary wanted to demonstrate that the United States could be "a reliable, flexible supplier, even in times of crisis." Part of this flexibility will no doubt involve postponing or stretching out payments on FMS deals to the region, a process which could result in hidden subsidies to U.S. weapons manufacturers. At a meeting in Bangkok with Thailand's Foreign Minister Surin Pitsuwan, Cohen referred to the F-18 deal and Thailand's larger economic problems when he said, "We know you are experiencing difficulties. But we hope we can provide assistance and support in a variety of ways." Congress should ask Secretary Cohen exactly what this assistance will entail, and what it will cost U.S. taxpayers.[25]
U.S.
Government Promotion of Arms Sales to Potential NATO Members:
Meanwhile, the State Department has encouraged U.S. ambassadors in Romania, Hungary, Poland, and the Czech Republic to play a forceful role in hawking U.S. attack helicopters, fighter planes, and missiles to those nations. A number of examples of embassy lobbying have been reported already, and they are probably just the beginning. In Romania, the New York Times notes that a $1.4 billion deal for Cobra attack helicopters was "aggressively pushed by the United States Embassy working in tandem with Bell Helicopter Textron." In Hungary, the U.S. ambassador joined his defense attaché, 50 uniformed U.S. military personnel, and numerous U.S. arms industry lobbyists for the kickoff of a military air show at the former Soviet air base at Kecskemet. According to McDonnell Douglas Aerospace President Michael Sears, the job of the U.S. government representatives at the gathering was "to push American products." In the Czech Republic, when Ambassador Jennone Walker met with the Defense Minister in May of 1997 regarding their potential purchase of F-16 or F-18 fighters, she reported afterwards, "I told them . . . that I absolutely hope that you buy American." And in Poland, former U.S. ambassador Nicholas Rey had what New York Times reporter Jane Perlez described as a "heated face-to-face meeting" with President Alexander Kwasniewski to dissuade him from going forward with a $700 million deal to buy anti-tank missiles from an Israeli company, in the hopes of clearing the way for Poland to buy Boeing Hellfire missiles instead.[26] The Commerce Department has also strongly signaled its willingness to play a role in pushing weapons to East and Central Europe. The agency's June 1995 European Diversification and Defense Market Assessment provides tips to U.S. weapons manufacturers on how to sell their products in the Czech Republic, Estonia, Hungary, and Poland, highlighting opportunities to get involved in everything from sales of rifles, night vision systems, and bullet proof vests in the Czech Republic to major weapons upgrades and coproduction arrangements in Poland. And the "National Export Strategy" released by Commerce Secretary William Daley in October of 1997 cites the "demand for U.S. fighter aircraft by countries planning to join NATO" as a major target for export promotion activities in East and Central Europe.[27]
Bringing
It All Together: Promotion of U.S. Arms at Air Shows and
Military Exhibitions Based on the Pentagon's own mandated reports to Congress on air show participation, the costs of air show subsidies may have risen to record highs during 1996/97. In all, DoD reported sending equipment and personnel to 19 international weapons exhibitions during 1996/97, at an official cost of more than $5.1 million. This represents two and one-half times as many shows and nearly three times the dollar value as was officially reported by the Pentagon in 1994/95. Making a conservative calculation of full costs at 13 times the Pentagon's official figures, taxpayer subsidies for air shows during 1996 and 1997 were at least $68.4 million, for an annual average of $34.2 million. The driving force behind the increase in air show costs is the Pentagon's decision to participate in new shows in areas where U.S. firms are pushing to sell weaponry, including Argentina, Venezuela, Malaysia, and Thailand. During 1996/97, the Pentagon participated in at least six major weapons exhibitions where weapons-purchasing officials of East and Central Europe were present in significant numbers: the Berlin, Paris, and Farnborough Air Shows; the IMDEX and Euronaval shows of naval equipment held in France and the United Kingdom; and the Eurosatory ground-equipment show in Paris. The official estimates for U.S. participation in these NATO-related shows were in excess of $1.1 million, with full costs totaling a projected $14.3 million. These official tallies do not include the costs associated with displaying U.S. equipment at a number of smaller air shows that have been held in Hungary, Poland, and the Czech Republic. For example, the Air Force provided aircraft for use in test flights at the Kecskemet Air Show in Hungary in October of 1996, and at the Bydgoszca Air Show in Poland in August of 1996. At both air shows, U.S. Air Force F-16s based at the Spangdahlem Air Base in Germany were flown over to perform demonstration flights for prospective buyers (2 to Kecskemet and 7 to Bydgoszca). The fact that the involvement of U.S. aircraft in these shows was never reported to Congress may indicate an effort by the Pentagon and the Air Force to disguise the costs of promoting U.S. arms sales to East and Central Europe. When asked about the costs of sending U.S. aircraft to smaller regional shows like these, Chuck Hunter, an official with Lockheed Martin's fighter division in Fort Worth, has said "I'm sure they were covered by the Air Force . . . that's the norm."[29]
III. Fact Versus Fiction on NATO Costs: The Incredible Shrinking Estimate "DoD estimates that the total cost of creating this mature defense capability for an initial tranche of new NATO members to be $27-35 billion . . . Of this, the United States might be expected to pay $1.5 to $2.0 billion for direct enlargement costs . . . and an undetermined portion of the cost of restructuring the militaries of new members" [emphasis added]. In addition to assessing the considerable burdens of NATO expansion on U.S. foreign and military aid programs, there is a larger issue to be reckoned with: What will be the full cost of expanding NATO, and who will pick up the tab? Although advocates of NATO expansion have been trying to lull the public into believing that this ambitious initiative will cost very little (see quotes above), there is strong evidence to suggest that the full costs could be as much as 100 times higher than the Clinton Administration's rosy projections. So far, there have been five major attempts to estimate the costs of NATO expansion, including two by U.S. government agencies, one by the government-funded RAND Corporation, one by the non-profit Cato Institute, and one by NATO itself. The estimates range from an official NATO figure of $1.3 billion for the whole alliance to provide limited infrastructure and communications upgrades for three new members, to a Pentagon estimate of $27-$35 billion between now and the year 2010 for adding "an unspecified number of East and Central European nations" to NATO (of which the U.S. share is pegged at $1.5-$2 billion), to a Congressional Budget Office estimate of up to $125 billion through 2010 for an ambitious expansion strategy that would include the forward deployment of small numbers of NATO forces in new member states.[30] None of the published estimates reflect the full costs of NATO expansion, for the simple reason that they consider at most the costs of admitting four new members -- current invitees Poland, Hungary, and the Czech Republic, plus Slovakia. In reality, NATO's "open door" policy could lead to the admission of a dozen or more new members between now and the year 2010, including the four already mentioned plus Bulgaria, Estonia, Latvia, Lithuania, Romania, Slovenia, the Ukraine and possibly even Albania and the Former Yugoslav Republic of Macedonia. In fact, as noted above, all 19 East and Central European nations and former Soviet Republics that receive U.S. military aid under the Partnership for Peace program are considered potential NATO members. And the Congressional Budget Office (CBO) has indicated that of the nations "most often mentioned in the public debate as candidates for entry" into NATO, "with the exception of Slovenia, most of those nations would be difficult or costly to defend." Therefore, it is reasonable to expect that future rounds of NATO expansion could be even more costly than the current one.[31] Assuming that NATO adds a dozen new members instead of just three, the CBO's top line estimate of $125 billion for NATO expansion could easily quadruple to $500 billion or more. The addition of new members is not some distant, abstract issue: the next round of expansion could begin as early as 1999, and potential new members are already busily jockeying for position.
Debunking
the Pentagon's Flawed Estimate: The flaws in the administration's official cost estimate of NATO expansion are simply too glaring to ignore. First, the Pentagon estimate doesn't even attempt to put a cost on the growing list of U.S. subsidies that are being offered to potential NATO members -- despite the fact that these subsidies are already contained in the federal budget. Similarly, the release of a Pentagon cost estimate based on only three or four new members -- when countries ranging from Slovenia and Romania to Bulgaria and the Baltic states have been receiving tacit assurances that they too will get their chance to join the alliance -- suggests an effort to come up with a politically palatable cost figure, not an accurate one. As Ivan Eland, a former analyst at the Congressional Budget Office who is now based at the Cato Institute, has noted, even the costs that the Pentagon does acknowledge seem to be calculated based on spin control, not objective analysis: "The administration . . . failed to do a bottom-up costing of the detailed military improvements needed for expansion. In many cases, they simply chose an amount of money that they wanted to spend on a broad category of items -- for example, logistics improvements. They often picked a number without providing a military analysis of what was needed or many details on the improvements made or costs incurred. In essence, DoD's estimate is not a requirements-based cost analysis but an estimate of what is affordable -- that is, the costs the administration believes Congress will accept."[32] A General Accounting Office (GAO) assessment is similarly critical of the Pentagon cost estimates, which it describes as "notional" -- a polite way of saying your guess is as good as mine: "Many of DoD's estimates for specific cost elements could not be verified. DoD officials did not consistently document their analyses. As a result, we were unable to audit or validate estimates for most specific cost elements."[33] Last but not least, the GAO identified U.S. military aid to prospective NATO members as a major area of cost that had been completely overlooked in the Pentagon estimate: "NATO enlargement could entail additional costs beyond those included in the DoD estimate. These costs could include assistance, such as enhanced Partnership for Peace or other bilateral assistance provided as consolation for countries not invited to join NATO in July 1997. There will also be additional costs associated with subsequent decisions to invite additional countries to join NATO. In addition, the United States may provide assistance to help new members restructure and modernize their forces, which DOD acknowledged but did not include in its estimate of the U.S. cost share. For example, Polish officials said they may need up to $2 billion in credits to buy multi-purpose aircraft. While not an added cost of enlargement, such assistance would shift the cost burden from the new member countries to the countries providing assistance. (emphases added)[34] Ivan Eland of the Cato Institute has developed an alternative estimate of NATO expansion costs that accepts the Pentagon's optimistic assumptions about the size and scope of NATO expansion but uses more realistic figures for the costs of each element of the plan. Under Eland's approach, total costs of expansion come to at least $70 billion, with the U.S. share reaching $7 billion, a figure 3 to 4 times higher than the official Clinton Administration estimate. Eland further notes that if the security situation were to deteriorate in East and Central Europe and NATO troops had to be deployed in the new member states in significant numbers, the total costs of expansion could reach $167 billion -- and this would still represent the costs of adding just three or four members, not the dozen or more hoping to join the alliance.[35]
Burden
Sharing: The U.S. as Bankroller of Last Resort As for the contribution of prospective NATO members in East and Central Europe, the notion that they can cover the entire costs of bringing their forces up to NATO standards is wishful thinking, to put it mildly. The Congressional Budget Office has estimated that nations like Poland, Hungary, and the Czech Republic would have to spend six times what they are currently spending on weapons procurement and R&D to keep pace with NATO modernization goals, an unlikely prospect given the region's economic fragility. The International Monetary Fund has already criticized Romania's planned $1.4 billion purchase of Cobra attack helicopters from Bell Helicopter Textron as violating IMF budgetary targets, and countries like Bulgaria have even gone so far as to turn down free weaponry like C-130 transports from the U.S. because they can't afford to maintain the equipment.[37] According to NATO's own internal assessments of the three proposed NATO members' military capabilities (obtained and summarized by the industry publication Defense News), "Hungary, Poland, and the Czech Republic are profoundly unprepared to join NATO and are years away from having militaries that are minimally functional, much less strategically interoperable with NATO's military systems." NATO reports that the Czech Army's equipment is all "old and approaching obsolescence," that Poland's Navy trains at levels "well below NATO standards," and that making Hungary's Air Force interoperable with NATO will be "very difficult or impossible in the near term."[38] The NATO assessments also note that the prospective member states lack adequate communications facilities and refueling capabilities. Taken together, these internal NATO evaluations give a starkly different picture than the one Secretary of State Madeleine Albright has been painting. In Congressional testimony last November, she asserted that "It now appears, as we examine the assets and infrastructure that our new allies bring to NATO, that the commonly funded cost of integrating their armed forces will be lower than we estimated in February." Given the limited resources Poland, Hungary, and the Czech Republic to bring their forces up to NATO standards -- and the ready availability of U.S. loans and grants to finance weapons purchases -- the United States is likely to bear the greatest burden in financing military modernization in East and Central Europe. With Western European governments unwilling to pay their share and East Europeans unable to do so, the U.S. portion of NATO expansion costs could easily reach one-third to one-half of the total amount spent, not the 6% to 15% figure used in official estimates. As former U.S. ambassador to Russia Jack Matlock has noted, "We're going to have a dilemma that we either encourage them [new NATO members] to divert resources they don't have or we end up fooling the American people about what it's going to cost them. One thing is certain -- the Europeans will pay nothing."[39] As a result, the U.S. is likely to become the bankroller of last resort for NATO expansion. If the top-line cost estimate of $500 billion for NATO expansion comes to pass and the U.S. share is one-third to one-half, the total U.S. contribution to NATO expansion could reach $170 to $250 billion over the next 14 years, a figure that is eighty to 100 times greater than the Pentagon's estimate.
The Down Payment: Paving the Way for NATO Expansion, F.Y. 1996-1998 Another way of demonstrating the inadequacy of the Clinton Administration's estimates of the costs of NATO expansion is to look at how much money has already been spent in the past three years to support the goal of enlarging the alliance. Over the past three years, the United States government has authorized over $1.2 billion in grants and loans to support NATO expansion, a figure that is more than one-half as large as the Pentagon's estimate for the total costs of NATO expansion over the next twelve years. For a breakdown of these costs, which include grants, subsidized loans, and the costs of military training and exercises involving potential NATO members, see Table II, below.
IV.
Desperately Seeking Subsidies: Arms Industry Lobbying
The
War at Home: Domestic Lobbying for NATO Expansion Campaign contributions to key members of Congress were a major factor in getting the $15 billion loan fund approved. Major arms exporting firms spent a record $11.8 million in campaign donations during the 1995/96 election cycle, and members of Congress who voted with the industry on issues like the $15 billion arms export loan fund were handsomely rewarded. When Sen. Dale Bumpers (D-AR) introduced an amendment to strip the arms export loan fund proposal out of the F.Y. 1996 Pentagon appropriations bill on August 3, 1995, his initiative was defeated by a vote of 58 to 41, thereby clearing the way for the establishment of this new subsidy program. The 58 Senators who voted with the arms industry to kill the Bumpers amendment received over $1 million from arms exporting companies during the 1995/96 election cycle, an average of $18,113 per Senator. In contrast, the 41 Senators who voted to block the new subsidy received $316,000 from the arms industry, or an average of $7,731 per Senator.[40] The most conspicuous example of corporate involvement in lobbying for NATO expansion is the role of Bruce L. Jackson, Lockheed Martin's Vice President for Strategic Planning, as the President of the U.S. Committee to Expand NATO. Although Mr. Jackson has described his role as president of the Committee as a "hobby," his visibility as a spokesperson for NATO expansion makes it hard to avoid the conclusion that he is on loan from Lockheed Martin to the lobbying group as needed. Mr. Jackson is not the only Lockheed Martin official involved in the Committee's advocacy efforts. In the summer of 1997, when the group held a dinner for twelve Senators to hear Secretary of State Madeleine Albright expound on the virtues of enlarging NATO, Bernard L. Schwartz was on the guest list. As a result of the 1996 merger of his company, Loral, with Lockheed Martin, Mr. Schwartz became part of Lockheed Martin's top management. He also has the distinction of being the top individual soft money donor to Democratic Party committees during the 1995/96 election cycle, donating $601,000 (out of $632,000 in total soft money donations). As such, his presence at functions held by the U.S. Committee to Expand NATO, like the dinner briefing with Secretary of State Albright, no doubt helps focus the attention of incumbent Senators, who may need to turn to Mr. Schwartz or Lockheed Martin for assistance in their re-election campaigns. The company as a whole made $2.3 in political donations during the 1995/96 election cycle, far more than any other military contractor.[41] Other corporate connections to the U.S. Committee to Expand NATO include Steve Hadley, who served as an Assistant Secretary of Defense in the Bush Administration and is now at Shea and Gardner, the law firm that represents Lockheed Martin; and Sally A. Painter, a former Director of the Office of Business Liaison in the Commerce Department during the Clinton Administration who is now Director of Government Relations (International) for Tenneco, a major defense contractor with a significant involvement in military shipbuilding. Ms. Painter has also contributed funds to the U.S. Committee to Expand NATO. The committee has sustained a strong presence on Capitol Hill by briefing more than one-third of the members of the Senate, distributing pro-expansion information packets and fact sheets at major Senate hearings, and purchasing full-page ads in favor of NATO enlargement. Five ads have run in Roll Call, a weekly newspaper that is widely read by members of Congress and their staffs, with more planned in the weeks prior to the Senate vote on adding Poland, Hungary, and the Czech Republic to the alliance.[42] Meanwhile, back on the campaign-spending front, U.S. military contractors are on track to break their record spending levels of 1995/96. According to Federal Election Committee figures analyzed by the Center for Responsive Politics, weapons manufacturing firms spent over $3.5 million on political contributions during the first seven to nine months of 1997, including $2.3 million in Political Action Committee donations to specific candidates and $1.2 million in soft money gifts to political parties. This is an impressive sum considering that 1997/98 is a non-presidential election cycle. If military industry donations continue at this rate, the industry could spend $12 million during the 1997/98 cycle, outpacing its previous record of $11.8 million in 1995/96. In addition to the non-stop nature of modern political fundraising, a major factor driving the pace of contributions by weapons contractors is the presence of significant upcoming issues that will affect their bottom line: the possible termination of the B-2 bomber, the debate over whether to deploy a full-scale Star Wars defense system by the year 2002, and, last but not least, the upcoming Senate vote on whether to ratify NATO expansion, which could mean billions in subsidized arms sales to East and Central Europe over the next decade. Lockheed Martin was once again "leader of the PACs" during 1997, with $639,000 in political spending, including $312,000 in PAC contributions and $327,000 in soft money donations. This represents nearly one out of every five dollars in political donations made by defense companies during 1997. Lockheed Martin's Bernard Schwartz is also on a record pace for soft money donations by a military industry executive during the 1997/98 election cycle, with $256,000 in contributions to Democratic Party committees between January and mid-July of 1997. Significantly, Schwartz's gifts include $100,000 for the Democratic Senatorial Campaign Committee (DSCC), a body whose finances are of particular interest tokey members of the Senate who will be voting on NATO expansion next month. One $50,000 check from Schwartz was forwarded to the DSCC shortly after his appearance at the U.S. Committee to Expand NATO's dinner briefing for a dozen Senate members, held in the summer of 1997.[43] U.S. weapons manufacturers have also attempted to gain political leverage by coordinating their activities with ethnic lobbying organizations such as the Polish American Congress and the Hungarian American Foundation that are working to promote NATO expansion. Sophia Miskiewicz, the legislative director of the Polish American Congress, told Bill Mesler of the Nation magazine, "We will be working [with the U.S. Committee to Expand NATO] more and more as ratification comes up," and Cece Boyer, a spokesperson for the Committee, has acknowledged that the group has formed a loose coalition with several ethnic-based lobbying groups. A number of U.S. weapons manufacturers have provided financing for ethnic- based lobbying groups working on NATO expansion. The New York Times reported last summer that Lockheed Martin and Bell Helicopter Textron are among a number of U.S. arms makers that will be supplying funds for a pro-NATO expansion foundation that is being established by the Romanian Embassy in Washington. Mircea Geoana, Romania's Ambassador to the U.S., noted that "the most interested corporations are the defense corporations, because they have a direct interest in the issue." Dick Smith, a Textron lobbyist in Washington, noted that his company -- which is still hoping to revive a $1.4 billion sale of Cobra attack helicopters to Romania -- is pressing for Romania to be added to NATO by "doing everything we can to tell their story to our friends here."[44] Research by the Washington-based National Security News Service has also demonstrated that Boeing, whose McDonnell Douglas unit is competing to sell F-18 fighters to the Czech Republic, is a corporate funder of the American Friends of the Czech Republic (AFoCR), another pro-expansion organization. In addition, Ronald Bartek, one of the five directors of AFoCR, is the vice president of Mehl and Associates, a consulting firm that is helping set up joint ventures between Czech companies and U.S. arms makers like Lockheed Martin, Textron-Bell, and Northrop Grumman. Bartek told the National Security News Service that although "there are some nice overlays with our commercial interests" he supports NATO expansion out of "personal conviction," not economic concerns.[45]
The
Marketing Blitz: Selling NATO (and U.S. Weapons) in East
and Central Europe: In October 1996, six months prior to Augustine's marketing trip, Lockheed Martin engaged in an even more innovative promotional tactic when it prepared a series of free "defense planning seminars" for officials in Poland, Hungary, and the Czech Republic. Gordon Bowen, Lockheed Martin's director of requirements and analysis, described the seminars as a way to provide its potential clients with "a structured way to try to analyze military objectives and a structured process for looking at military alternatives." Bowen claims that the free seminars "are not marketing operations." "We were not handing out pamphlets explaining why the F-16 is the best fighter in the world," he stressed. But Bowen did admit that the meetings benefited the company because "they allow us to know who the decision makers are, what their value structures are, and what their needs are; to build relationships with these people . . . It is in line with our own beliefs and objective that we want to be the major defense contractor to supply these countries."[47] And a review of the company's presentation outline for its two-day seminar with Polish officials, obtained by the author, suggests that the sessions were in fact a thinly disguised marketing pitch. For example, the presentations included a map entitled "postulated military threats" with menacing arrows itemizing specific numbers of enemy fighter planes (860), attack helicopters (360), and surface-to-air missiles (1,700) all converging on Poland. David Ruppe of Defense News has reported that a second map displayed during the seminar "shows attacks coming from Russia and the Baltic Sea, and conflict occurring on Poland's Ukrainian, Belarussian, and Czech Republic borders."[48] One of the later presentations included a chart detailing a "Best Acquisition Plan" that proposes a lease of 7 fighter aircraft for the period 1996-2001 (a reference to the free leases of F-16s that Lockheed Martin had convinced the Air Force to offer to Poland) overlapping with an initial purchase of 24 fighter aircraft on a "12 year loan." In one sense, Bowen's description of the seminar was accurate: the goal was not so much to convince the Polish military of the specific virtues of the F-16; it was to sell them on the need to buy as many F-16s as possible. The procurement seminars were just one part of a multi-pronged marketing blitz that Lockheed Martin launched in East and Central Europe in the fall of 1996. According to a company press release, Dain Hancock, the president of Lockheed Martin Tactical Aircraft Systems, made several pitches for the F-16 in Hungary, Poland, and the Czech Republic in September 1996, several weeks prior to the free procurement seminars. According to Lockheed Martin's own account of these meetings, Hancock "outlined potential F-16 programs, including industrial participation in the production of the aircraft, economic cooperation equal to 100 percent of aircraft purchases, up to 100 percent financing, and an F-16 unit flyaway cost of approximately $24 million per aircraft" (emphasis added).[49] In essence, Hancock's offer of 100% economic cooperation (investments or contracts equal to the entire cost of the F-16s) plus full financing made it sound like a "no lose" proposition for the purchasing countries -- the impacts of such an arrangement on U.S. taxpayers and U.S. workers are another matter. Hancock's tempting offer was supplemented by opportunities for Polish Air Force pilots to test ride F-16s at Poland's August 1996 Bydgoszca Air Show. F-16 flights were also provided for "senior Hungarian government officials" at an air show held at the Kecskemet Air Base in Hungary on October 29-30, 1996. The Kecskemet flights were followed-up by a week-long "flight evaluation" of the F-16 by a team of Hungarian pilots and technical experts, held at Lockheed Martin's Fort Worth facilities in November, 1996. Lockheed Martin Tactical Systems has even appointed an "International Vice President for Hungary," Doug Miller, who describes his goal simply as "the successful introduction of the F-16 into the Hungarian Home Defence Forces."[50]
Offsets:
Exporting U.S. Technology and Jobs Although offsets are not a government subsidy, they do represent a powerful corporate subsidy from U.S. weapons makers to their overseas clients, which results in the export of jobs and technology from the United States, further diminishing the domestic economic benefits of U.S. arms sales in the process (see data later in this section on the economic impacts of offsets). Lockheed Martin spokesperson Kathryn Hayden has pledged that the company will provide 100% offsets on any sale of fighter aircraft to East and Central Europe, and the company has been moving aggressively to make good on that pledge. Over an eight day period in September 1996 the company held "Industrial Team Cooperation Conferences" in Warsaw, Budapest, and Prague at which 11 Lockheed Martin companies and 39 major Lockheed Martin subcontractors met with representatives of 136 Central European companies. George Gruver, Director of Offset Programs for Lockheed Martin Tactical Systems, described the meetings as part of the company's "ongoing efforts to form partnerships with Central European industry" both in the aircraft industry and other industrial sectors. In the past, offset investments were generally made after an arms sale was approved, but as more and more suppliers chase fewer and fewer paying customers, the practice of "pre-offsets" has taken hold, in which U.S. and Western European weapons firms funnel money into the economies of potential arms clients beforehand, in the hopes of currying favor with key officials and sealing new arms deals. For example, Lockheed has a deal with Polish aircraft manufacturer WSK PSL-Mielec to coproduce F-16s at its facilities when, and if, Poland opts to purchase the plane, and Boeing/McDonnell Douglas is buying a piece of Czech manufacturer Aero Vochody to improve its chances of selling F-18s to the Prague government. Meanwhile, in a more complex arrangement, Textron has agreed to buy 70 percent of the Romanian helicopter company IAR Brasov in anticipation of a deal with the Romanian government involving the purchase of $1.4 billion worth of Cobra helicopters from Textron's Bell Helicopter unit. The Romanian government had hoped to finance its purchase by exporting Cobras built in Romania to third parties, but the deal has been temporarily shelved due to concerns by the International Monetary Fund about its impact on Romania's budget deficit. Last December, however, Romanian and Bell officials spoke optimistically about refinancing the deal in a form that would be acceptable to the IMF, and a Bell executive specifically cited the possibility of getting loans to pay for the sale. Lockheed Martin's Doug Miller has described Hungary's military offset program -- which requires companies to invest in Hungary in order to even bid on arms sales to that country -- as "innovative." Another U.S. defense executive complained that "whether you win or not, you have to do business in Hungary. For the guys who lose, it will be a gift."[51] All of these prospective offset deals to East and Central Europe have one common denominator: they involve exporting jobs and investments to foreign arms clients at the expense of U.S. workers and companies. With coproduction and offset deals in a dozen foreign countries already, the Lockheed Martin F-16 program supports more direct production jobs overseas than it does in the United States, including a massive 2,000 person production line in Ankara, Turkey and a major F-16 assembly plant in Seoul, South Korea. A Commerce Department survey of 204 small and medium-sized defense subcontracting firms in the United States found that 83% of them reported losing business to offsets, including some subcontractors, which had helped foreign firms learn how to make specific items only to be displaced as the principal supplier of that item to major U.S. manufacturers like Boeing.[52] Offsets are on the rise, with a 1997 Commerce Department report indicating that 81.5 percent of the value of U.S. weapons exports was counterbalanced by offset arrangements with foreign purchasers (mostly in Europe).[53] The rush to provide offsets for prospective deals in East and Central Europe will most likely increase these offset levels in the years to come, further draining the few economic benefits the United States receives from exporting arms. In fact, at a conservative estimate of 50% average offsets, the $12 billion in weapons sold by U.S. firms in 1996 will yield only $6 billion in net benefits to the U.S. economy. Add to this the $7.8 billion in subsidies that the U.S. government provided, and U.S. arms sales resulted in a net loss to the U.S. economy of $1 to $2 billion for 1996. In addition to putting its weapons systems on display and promising a variety of economic benefits for its potential clients in East and Central Europe, Lockheed Martin has not been shy about brandishing U.S. government subsidies to gain an inside track on arms contracts from potential NATO members. Robert Trice, the company's Vice President for International Business Development, has cited the Pentagon's $15 billion arms export loan guarantee fund as a likely source of support for sales of the company's FPS-117 radar in East and Central Europe. And an official of the Hungarian Ministry of Foreign Affairs indicated that Lockheed Martin has "a much better chance" than its Italian competitor of winning the competition for selling air defense radars to Hungary because of the subsidized loans that are available through the Pentagon's Central European Defense Loan program. In the meantime, Lockheed | ||||||||||||||||||||||||||||||||||||
