Defense Trade Advisory Group Plenary

Andrew J. Shapiro
Assistant Secretary, Bureau of Political-Military Affairs
Dean Acheson Auditorium
Washington, DC
May 3, 2011

As prepared

Sam, thank you for that kind introduction. I want to thank all of you for taking time out of your busy schedules to attend today. I would especially like to recognize the members of the Defense Trade Advisory Group for all the hard work and invaluable service you provide to me and the Department. I also understand that representatives from several of our foreign partners have joined us today. Let me extend a special welcome to those of you from the Embassies of Canada, The Netherlands, and Sweden. During the meeting I encourage you to engage actively with our DTAG members, and to provide your insight and experience on defense trade issues.

Today, I want to talk about two things. First, the current geopolitical landscape and its impact on the defense trade. And second, I’ll give a brief update about where we are since the last DTAG meeting in October.

We all know that the defense trade is closely tied to the geopolitical environment. In the last few months a region central to U.S. foreign policy has seen a wave of historic changes. On top of this, the world has continued to struggle to deal with the effects of the global economic downturn. In light of these events, I wanted to take a few minutes to talk about how the dynamic geopolitical landscape is impacting the defense trade.

It is clear that the global economic downturn is having an impact on defense spending worldwide. For instance, spending on defense declined in Europe, where many governments have been forced to undertake tough austerity measures. In the UK, budget cuts are putting pressure on defense spending. Here in the United States we are certainly feeling the effects of tighter budgets. Concerns over deficits prompted President Obama to recently announce the goal of cutting $400 billion for defense by 2023.

I certainly cannot predict the economic future. But global budgetary constraints in the years ahead may continue to put downward pressure on defense spending – forcing countries to make tough defense choices and creating stiff competition in the defense trade. It seems that the tremendous expansion in global defense spending we witnessed in the last decade may be a thing of the past.

Nevertheless, there are also countervailing trends that ensure continued strong global demand for U.S. defense products. As you know, the Bureau of Political-Military Affairs exercises the Secretary of State’s authority to oversee arms transfers, both Foreign Military Sales and Direct Commercial Sales. In fact, Foreign Military Sales, or FMS, have actually increased dramatically over the last several years. Despite the global economic challenges, FY 2010 was our biggest year to date. And FY 2011 should be even bigger in light of recent agreements. Additionally, the US share of total global arms transfer agreements has increased over the last decade and we are increasing the share of our transfers to new emerging markets in the developing world.

The other aspect of U.S. arms sales involves Direct Commercial Sales, or DCS. Here too, despite the global economic slowdown, commercial sales continue apace. Based on the data we see on direct commercial sales, the PM Bureau expects little change in foreign demand for U.S. products. For the past several years DDTC has been averaging 80,000 to 85,000 licenses each year, and we are projecting 84,000 licenses for 2011. The export of defense articles also makes up a significant portion of the U.S. economy. The total value of authorized Direct Commercial Sales is approximately $145 billion or about one percent of GDP.

So what explains the continued strong demand for U.S. defense articles despite the global economic conditions? I think there are a few reasons:

First, countries want to buy the best, and to get the best they rightly turn to U.S. defense systems. U.S. companies continue to lead the way in making the highest quality, most dependable, and most technologically advanced products out on the market. The world recognizes this, which is a major reason why the demand for licenses and sales remains unchanged.

Second, our diplomatic ties with developing countries and emerging powers are expanding and strengthening. This is a byproduct both of U.S. diplomatic efforts and outreach, as well as these countries own desire to strengthen ties with the United States.

The developing world is growing economically at a steady clip, much faster than advanced economies – and as a result they are investing more in defense and represent an increasing share of the worldwide defense trade.

The emergence of new markets creates economic and diplomatic opportunities for the U.S. But it also poses challenges. Our ties with these countries may not be as strong as with other longstanding allies. International competition for sales in these emerging markets can also be fierce, especially as Russia and many EU nations attempt to expand their defense exports as well.

What is important to recognize with Foreign Military Sales is that when a significant arms agreement is made the countries involved are agreeing to more than just that transaction. The complex and technical nature of advanced defense systems often require continuous collaboration between countries. This includes training and support in the use of the equipment, assistance in maintenance, and help to update and modernize the equipment throughout its life-cycle. These sales often prompt close military-to-military relations and help improve our ability to operate and work with our allies and partners. In other words, these are transactions that often spawn a relationship that can last years and sometimes decades. When countries choose to enter into FMS agreements with the U.S. they are often ultimately making a long-term strategic commitment to a relationship with the U.S. FMS is therefore a critical tool that helps undergird our diplomatic relationships and strengthen alliances with countries around the world. This is why diplomatic efforts to improve and strengthen relations with emerging economies are so vital to the defense trade.

Upon coming to office, President Obama made it a priority to strengthen ties with large emerging powers like India and Brazil that are making concerted efforts to modernize their defense sectors. The first state dinner hosted at the White House by President Obama was for Indian Prime Minister Manmohan Singh. Additionally, just this year President Obama traveled to Brazil in an effort to advance the growing partnership between our governments. I myself attended Aero India in Bangalore this past February to advocate for U.S. defense sales. Thus, we are disappointed that our aircraft will not be participating in the Indian government’s final MMCRA selection process. This competition was an opportunity to make a big leap in our relationship through the coproduction and technology transfer the deal offered. Nevertheless, our strategic relationship is far greater than any one sale and defense cooperation has been expanding significantly and includes the sales of additional C-17 and C-130 transport aircraft, as well as an extensive list of helicopters, and other advanced systems. By making a concerted effort to build a lasting partnership with emerging powers, we are opening new opportunities for industry.

These efforts around the world are paying off, as we are seeing an increasing share of U.S. defense sales going to developing countries and emerging powers. This is true especially in the Middle East and South Asia where we’ve seen considerable growth in our exports. Our defense trade relationships are also expanding in Southeast Asia, where many countries are experiencing significant economic expansion and are increasingly turning to the United States to meet their security needs.

Third, expanding the defense capabilities of our partners will remain a U.S. national security priority. As Secretary Gates noted last year, “strategic reality demands that the U.S. government get better… at building partner capacity.”

Leaner global economic times do not reduce the global security challenges we face. To confront threats like terrorism, Horn of Africa piracy, illicit trafficking, and state failure, we will need to help strengthen the capacity of our partners and allies to address them. In Africa, which as a continent faces a number of security challenges, defense spending has expanded significantly. Through a variety of programs, the PM Bureau is working to increase the professionalization and expand the capability of partner militaries on the continent. Additionally, we are working closely with countries in Central and South America to expand their defense capabilities to address narco-trafficking and internal security challenges.

Expanding the capacity of our partners to provide for their own security, to protect and police their borders, and to maintain order and the rule of law are critical to efforts to promote development and safeguard democratic governance. Building partner capacity will continue to be a major priority in the years ahead, as we lean on our partners to pick up a greater share of the global security burden.

Fourth, demand for U.S. defense articles will remain strong because the U.S. has longstanding defense commitments to allies around the world. Last year we ratified the UK and Australia defense trade treaties, which will ensure even closer cooperation with these long standing allies. We will also continue to work closely with our NATO partners, as we operate together in Afghanistan and now Libya. Our defense partnerships with the governments of Iraq and Afghanistan will remain very close well into the future even as U.S. force numbers decline.

In Asia, we continue to work closely with our longstanding friends and allies, such as Japan and the Republic of Korea. We have a lasting commitment to the security of these countries and as such our defense relationships are broad-based and comprehensive. Our Foreign Military Sales with these countries also demonstrates the long-term nature of the commitment involved in FMS agreements. We are currently providing significant technical support and life cycle upgrades to systems included in past FMS agreements. This includes upgrades to radar systems for F-15s in Japan and a modernization program for F-16s in the Republic of Korea. We are also always looking to strengthen these relationships. In the years ahead, FMS and DCS of military goods and services will continue to be crucial tools to ensure that these close allies are able to meet their security needs. For instance, Japan is currently in the process of selecting a replacement for their aging F-4 fighters. U.S. companies have formally submitted applications to replace the F-4 and I believe these proposals are highly competitive.

As always, Israel is a vital ally and a cornerstone of our regional security commitments in the Middle East. As Assistant Secretary for Political-Military Affairs, one of my primary responsibilities is to preserve Israel’s qualitative military edge, or QME. By law, we have to take Israel’s QME into account when assessing every sale in the region – and I can assure you, we do so rigorously. Furthermore, a significant aspect of maintaining Israel’s QME are U.S. defense sales and cooperation, which ensure that Israel possesses the advanced defense systems it needs to provide for its security.

For all these reasons we will remain very busy no matter the fluctuations of the global market. But while demand will remain strong, the dynamic nature of the geopolitical landscape may require some adjustments and an ability on our part to adapt to changing situations.

Currently, we are witnessing another geopolitical shift, which may have broad implications for U.S. foreign policy. The popular uprisings across the Middle East represent perhaps the most significant geopolitical development since the end of the Cold War. Historic change of this magnitude will inevitably prompt us, as well as our colleagues throughout government, to reassess current policy approaches to ensure they still fit with the changing landscape. While the impact on our defense relations and the defense trade is uncertain, changes in the region may lead to changes in policy and therefore changes in how we do business. This is to be expected.

It is important to emphasize that arms transfers are a tool to advance U.S. foreign policy. And therefore when U.S. foreign policy interests, goals, and objectives shift, evolve, and transform over time, so will our arms transfer policy.

In the current dynamic geopolitical environment, it is natural that we take a look at our policies and approaches. For instance, we in PM are taking a close look at the Conventional Arms Transfer policy. This policy has suited the United States well since it was enacted just after the end of the Cold War. But it is time to dust off its pages and make sure that it reflects the reality of today. We don’t know yet what specific changes, if any, are needed. But in light of sweeping transformation it is essential that we, as well as our colleagues in other government agencies, assess current processes and procedures toward the region. We simply cannot operate as if it’s business as usual. U.S. foreign policy is not immune to geopolitical change and therefore neither is U.S. arms transfer policy. This is part of what makes the Defense Trade Advisory Group so valuable. By giving us a formal channel to the private sector, DTAG enables us to better evaluate U.S. laws and regulations, especially during times of immense change. As always we urge you to provide your thoughts and ideas over how we should move forward.

However, one thing we do know is that our defense relationships, our security assistance programs, our foreign military sales, and our defense trade with countries in the Middle East will likely be one of our most useful tools in building new partnerships, as well as strengthening existing ones. We know that the U.S. will continue to be engaged in the region. We remain committed as ever to Israel’s security and ensuring that Israel maintains its Qualitative Military Edge. We also remain committed to Gulf security, which was borne out last year, when we signed the largest defense trade deal in history with Saudi Arabia.

Foreign military sales are a critical foreign policy instrument that helps strengthen and solidify our relations with countries over the long term. Importantly, by establishing these long term connections and by building ties, especially between militaries, we gain influence and leverage, which can be used to help advance our foreign policy goals and objectives, including advancing democratic reform and human rights. These relationships can be especially valuable during times of crisis. In Egypt our military sales, our security assistance, and our long-running defense relationship gave us influence and leverage that enabled us to urge restraint and encourage democratic reforms. We believe that our security relationship can continue to play an important role as Egypt’s democratic transition unfolds.

This influence however has its limits and cannot dictate another country’s actions. But that is why we scrutinize all arms sales. In accordance with the Arms Export Control Act, the Secretary of State oversees and authorizes all arms sales, in order to ensure they advance U.S. foreign policy. Defense sales and transfers, as always, are thoroughly reviewed by the Political-Military Bureau here at State on a case-by-case basis to ensure any arms sale is in line with U.S. foreign policy so that it advances both our interests and our values.

Now let me turn briefly to Export Control Reform and the steps we have taken since the last DTAG meeting.

As you all know, Export Control Reform is a major priority of this administration, and we are pleased to note that the reform effort is continuing apace. We are increasingly making strides toward a new phase of Export Control Reform – where we convert the plans and concepts still on the drawing board into concrete proposals and regulatory changes. Since the last DTAG Plenary in October, the PM Bureau has initiated a number of ITAR revisions. We published proposed rules on the revision of USML Category VII and plan to publish additional categories for comment in the near future. We have also published a proposed new policy to address the so called “see-through” rule, and a proposed exemption for the export of replacement parts in the Federal Register. We are now in the process of reviewing comments and revising these rules for final publication. The final rule on Third Country and Dual Nationals should be published this week. DTAG recommendations were incorporated into all of these rules.

By giving us a formal channel for regular engagement with the private sector, the DTAG is an invaluable tool for helping us advance reform. In March, I handed you two difficult problems: namely, how tiers will be implemented and how a Government Program License, which would streamline the submission, review, and adjudication of a license application, could be taken from just a concept into a set of specific procedures that could be implemented in the ITAR. I look forward to hearing your input on these two important facets of export control reform. After the DTAG presents its findings, Bob Kovac will be presenting the current draft concept for defining “specially designed” and will be looking for your first impressions of the most recent interagency draft.

Improving efficiency is also a constant goal of the Bureau. Despite all the great progress we have made, there is always more to do. For instance, we are examining ways to move away from paper to online and electronic processing. We are looking to institute electronic payment of registration fees, and we hope to enable electronic submission of the registration form itself. This will be a significant improvement, as the current ITAR registration process is a paper process.

To close, let me once again thank you for your attendance and your thoughtful engagement. I remain optimistic that we will work collaboratively in making Export Control Reform a reality. Your experience in defense trade will be invaluable as we continue to move forward. Thank you, Sam, for the opportunity to address the DTAG today.