Takeaways from Dip in U.S. Foreign Military Sales

By Nooree Lee and Emma Merrill

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In December, the Defense Security Cooperation Agency announced the fiscal year 2021 transaction figures for the U.S. Foreign Military Sales program. Several trends revealed in the data could have major implications for contractors moving forward.

The agency reported $34.8 billion in total FMS transaction value for 2021, down 31 percent from fiscal year 2020 when the total reached $50.8 billion. The 2021 figure marks a decline for the second consecutive year and represents the lowest volume of foreign military sales transactions since 2016.

As recently as 2019, FMS totaled $55.4 billion, with a $51 billion average transaction value from 2017-2019. Transactions slipped slightly in 2020 to $50.8 billion but then cratered this past year. Because sales figures fluctuate annually due to a few high-value transactions, DSCA includes three-year rolling averages in its annual reports rather than only single year fluctuations. For example, FMS declined 28 percent in 2016 before recouping most of those losses the next year. Therefore, the significant decline in 2021 may be an anomaly.

Even though foreign military sales numbers may recover quickly, there are several notable takeaways.

First, the steep decline in FMS last year may not signal a decrease in America’s commitment to its global allies. Indeed, even though foreign military sales dropped 31 percent, the United States increased funding to the Foreign Military Financing program from $3.3 billion to $3.8 billion. In addition, U.S. contributions to the Building Partner Capacity programs remained relatively steady, declining slightly from $2.69 billion to $2.34 billion.

The decrease in overall FMS figures was driven by a 36 percent fall in foreign government-funded transactions.

Second, direct commercial sales, or DCS, arrangements between U.S. defense contractors and foreign governments dropped 16.8 percent in 2021, from $124.3 billion in 2020 to $103.4 billion. Foreign military sales involve the U.S. government directly procuring defense materiel or services before transferring them to a foreign defense ministry. In contrast, direct commercial sales do not involve the U.S. government as a contractual party.

The federal government oversees direct commercial sales, which are governed by U.S. export controls laws. But, compared to its direct involvement in FMS, the U.S. government’s oversight of direct commercial sales is primarily indirect. Therefore, the decline in DCS may indicate that the budgetary concerns of America’s allies drove the contemporaneous decline in foreign military sales more than the Pentagon’s shifting priorities did.

Third, certain critical factors may impede foreign military sales figures from rebounding quickly in 2022. Besides the COVID-19 pandemic’s ongoing impact on other nations’ defense budgets, the country-by-country figures published by DSCA reveal areas for potential regression this year. For example, the 2021 figures included approximately $1.26 billion in sales to Afghanistan, an amount that likely will decrease given the recent regime change.

The 2021 numbers also included a $1.5 billion allocation to France, which appears to have been boosted by an unusually large $1.3 billion transaction to supply aircraft launch and recovery equipment for the nation’s naval carrier program. In 2022, U.S. sales to France may regress closer to $220 million, the average for transactions with France from the preceding four years.

Additionally, Germany in 2021 entered into an unusually large $1.7 billion FMS contract for P-8A aircraft and accompanying services and equipment.

On the other hand, the United States’ recent commitment to support Australia’s submarine program may offset decreases in U.S. arms sales to countries like Afghanistan, France and Germany in the long term. The 2021 agreement between the United States and United Kingdom to deliver nuclear submarines to Australia will likely have a lasting impact on U.S. defense exports. Still, the budgetary impact of those commitments on DSCA programs remains uncertain.

Finally, the Defense Security Cooperation Agency’s annual report detailed America’s efforts in its institutional capacity building, international military training and education, and humanitarian assistance programs. In particular, the United States trained over 38,500 foreign military students and conducted 383 advisory, education and training engagements with civilian officials and military officers of allied nations.

In 2021, the U.S. government engaged in over 801 humanitarian assistance projects worldwide. It spent over $124 million on foreign humanitarian assistance, as well as $119 million through COVID-19 relief legislation, and $1.96 billion in support of more than 80,000 Afghan evacuees. Annual FMS statistics reporting typically has not included these programs.

Two data points do not make a trend. Thus, two years of declining FMS totals do not provide sufficient information to draw firm conclusions about the future of U.S. defense exports. But, whereas in 2019 the question was whether annual sales in the $55 billion range would become standard, now the question remains whether FMS transactions will rebound in 2022. Moreover, the Defense Security Cooperation Agency has signaled its commitment to international efforts, including humanitarian assistance, that further U.S. defense interests through alternative channels.

Nooree Lee is special counsel and Emma Merrill an associate at Covington & Burling LLP. They advise and represent government contractors in all aspects of the procurement process, including corporate transactions related to foreign military sales and other international contracting matters.

Topics: Global Defense Market

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