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Foreign Military Sales vs Direct Commercial Sales

Economic Overview

U.S. aerospace and defense exports (1) sustain a domestic workforce in the manufacturing sector, (2) support national security programs through the foreign military sales (FMS) and direct commercial sales (DCS) processes, and (3) narrow the U.S. trade deficit gap. In 2016 alone, aerospace and defense exports reduced the overall deficit by $80-90 billion dollars.

 

FMS Process

FMS – an acquisition program administered through the Defense Security Cooperation Agency (DSCA), with final approval by the State Department – supports security cooperation between the U.S. and its allies. While the U.S. government contracts out to the defense industry on a competitive or sole-source basis, it may also sell directly from its own stockpiles. When buying directly from the government’s stockpiles, foreign customers will have more leverage in the unit price of a defense system – as these same systems are also acquired by the U.S. military and defense agencies.

 

For qualified FMS customers, the U.S. Congress provides funding through foreign military financing (FMF). Authorized by the State Department, and administered through DSCA, FMF funding is a non-repayable loan legally granted to strategic countries – most notably Israel, Egypt, Afghanistan, and Iraq. While FMS cases must have departmental approval, they are exempt from the export licensing process.

 

Foreign customers view the FMS process as more transparent, reliable, and secure. The U.S. government takes on more of the contractual risk than the customer in the short run, and supports the sustainment of the defense system in the long run. A September 2016 White House approval of the sale of fighter jets to the Middle East illustrates the impact that FMS has on the U.S. economy, while concurrently serving U.S. national security interests.

 

DCS Process

DCS is regarded as a more flexible process, as the purchaser consults directly with industry about specific products and services it needs.  Foreign customers leverage more negotiating power regarding the type of contract (fixed price or firm fixed price), how the contract is written, final delivery requirements, and methods of payment. However, they must carry more risk and administrative burdens. DCS has the added benefit of giving customers options to purchase more non-standard systems that are mission specific, and designed to tackle readiness challenges. In these cases, the Pentagon does not support these types of mission requirements in their stockpiles, or in their annual budget.

 

Qualifying for an export license through DCS is based on how a product or service is categorized. The State Department’s Directorate of Defense Trade Controls (DDTC) executes authority in issuing export licenses to all defense related products and services on the U.S. Munitions List (USML), pursuant to the International Traffic in Arms Regulations (ITAR). The Department of Commerce’s Bureau of Industry and Security (BIS) grants export licenses to more commercial and “dual-use” defense products and services on the Commerce Control List (CCL), pursuant to the Export Administration Regulations (EAR).

 

Like the FMS program, DCS advances interoperability between the U.S military and its allies. Furthermore, foreign countries use FMF funding to purchase U.S. defense products and systems through both the FMS program and, on occasion, the DCS process.

 

Long-term Presence

As Fiscal Year (FY) 2017 comes to a close, FMS sales total roughly $64 billion, surpassing the previous record of $67.8 billion in total sales in FY 2012. While several deals are still pending, or are in the Letter of Offer and Acceptance (LOA) phase, the next few years will see growth for several defense companies and a growing industrial supply chain. However, as foreign competitors move into the global aerospace and defense market more vigorously, several factors will affect (and are affecting) the future long-term presence of the United States:

 

  • Credit Financing: The future of the Export-Import Bank of the United States (EXIM), and its credit and financing options to potential foreign customers;

         

  • Currency Valuation: The strength or weakness of the U.S. dollar driving the price of aerospace and defense exports; and

     

  • No-bid contracts: Competition in the form of subsidized, or state-owned, foreign defense companies receiving sole-sourced contracts in place of competitive contract bidding.

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