NARRATOR: As the twentieth century comes to a close, the United States is by far the world's leading exporter of weapons and military equipment. But in the international arms trade, America pays a high price for being number one.

HARTUNG: ... if you consider the fact that there's 140 countries now getting weapons from the United States, more than two-thirds of the countries in the world, not all of them are going to be reliable allies, not all of them are going to be coalition partners.

JOHNSON: ....it has been helpful, particularly with some countries, is helpful to U.S. defense contractors in that you wind up with the government as intermediary and, for one thing, as a guarantor of payment.

NARRATOR: Many foreign governments can't afford to pay the full cost of U.S. weapons, leaving American taxpayers to pick up the tab.

SUCHAN: There have been occasions where during the course of a program, change in an economic circumstance has meant that they haven't been able to follow through on a program to completion. Most obvious example is Thailand during the Asian Financial crisis.

GABELNICK: it ended up costing taxpayers hundreds of millions of dollars, because Thailand got in over its head.

ADM. CARROLL: I'm Admiral Eugene Carroll. Federal programs which help provide sophisticated weapons to other countries cost American taxpayers billions of dollars per year, and could lead to even greater risks and costs in the future. In this episode of America's Defense Monitor, we'll take a searching look at our government's role in the international arms trade, and what it is costing you.

NARRATOR: The United States military still holds vast stocks of weapons and equipment left over from the military buildup of the 1970's and 1980's. When the Soviet Union collapsed, the Pentagon chose to rely on its existing inventory of high-tech fighter jets… bombers… tanks… and warships. Most major buys of new American weapons were put off until after the year 2000.

As a result, American companies that make weapons and other military equipment have looked overseas for potential customers. In the 1990s, more that 150 billion dollars in arms deals have been struck between the United States and foreign governments.

But many of the arms trade's biggest customers are developing nations facing economic hardship, including our allies in the Eastern Europe, Asia, and the Middle East. Governments in these regions find it difficult to keep up with the skyrocketing costs of American military equipment.

So what happens when America sells weapons to countries who can't afford to pay for them?

HARTUNG: basically, countries don't have the money to lay out cash for these kinds of systems in the way that they used to. And so increasingly, the contractors are pushing the federal government to fill that gap and that means the taxpayers are on the hook.

NARRATOR: Dr. William Hartung is a Senior Fellow at the World Policy Institute, who has authored three major studies on the U.S. government's role in the arms trade. According to Dr. Hartung, government programs and activities that support the arms trade cost American taxpayers more than $7 billion dollars per year. That's more than half of the amount earned from the weapons sales themselves.

HARTUNG: So we're really getting to a point where all this talk about the arms trade as a great earner of income for our country is really a myth. Really what the arms trade is becoming is just another form of government subsidy for Lockheed Martin and Boeing and this money is not going to Poland, it's not going to Israel, it's not going to Egypt.

NARRATOR: Much of the funding which Hartung describes as a subsidy for the weapons industry appears in the United States federal budget under the heading of "Security Assistance." Consuming more than $6 billion dollars per year, Security Assistance accounts for about half of America's total budget for foreign operations. But as Dr. Hartung explains, much of this money never really leaves the United States.

HARTUNG: our tax dollars are used to go into this aid fund and then when a country like Israel, Egypt, Turkey wants to buy U.S. weapons, rather than pay for it themselves out of their own treasury, the money is withdrawn from this foreign military financing fund.... So essentially, our money stops briefly at the Pentagon, then heads direct to Lockheed Martin, Boeing, Raytheon, one of the big military contractors.

JOHNSON: clearly, that form of assistance is useful to our industry just as agricultural loan programs are useful to the agricultural sector.

NARRATOR Joel Johnson is Vice President for International Programs at the Aerospace Industries Association, a lobby group actively representing America's major defense contractors. Johnson acknowledges the benefits of government support, but objects to Security Assistance programs being singled out as corporate giveaways.

JOHNSON: I would argue that none of it's a subsidy, insofar as the government is allowing an ally to buy equipment. We, whether we provide, it's no different when we provide an F-16 to Egypt with government money than when you provide tractors or bulldozers to a Ghana with foreign assistance money. Those aren't a subsidy to Caterpillar.

NARRATOR: Security Assistance, along with other forms of foreign aid, has declined since the Cold War, but the government has begun to lend its support to the arms trade in other ways.

GABELNICK: The Clinton Administration has become the best salesman of the defense industry.

NARRATOR: Tamar Gabelnick is the Acting Director of the Arms Sales Monitoring Project at the Federation of American Scientists.

GABELNICK: They have instructed their personnel in overseas missions to actually push for U.S. arms sales. So what better marketing strategy could you have, than to have the U.S. government doing your bidding overseas.

NARRATOR: In 1995, President Clinton issued Decision Directive 34, which outlined his administration's policy on weapons exports. In it he urged Cabinet agencies to consider the economic benefit to American companies when deciding whether to grant a license for a military sale. The profit motive became a valid policy basis for selling weapons, and American diplomats were urged to find new markets for U.S. weapons, just as they would with any other product.

BURNS: "One of the considerations of course, is the impact of our -- industries here in the United States -- or whether or not we're willing to go forward with sales of conventional, or other, weaponry, anyplace in the world. We certainly listen to the defense industry in this country....."

NARRATOR: American embassy personnel, once charged with ensuring that foreign governments did not get their hands on American weapons and military technology, now act as pitchmen for military products.

JOHNSON: In terms of defense equipment, generally where you would look for your, because these tend to be large purchases, highly political, you're really looking for your support at the ambassadorial level. And, from Washington, DC. And, we clearly get some of that.

SUCHAN: security relationships continue to be a very very important part of American diplomacy. And in the past there were a variety of tools that we had, as far as underpinning a security relationship with other countries. And a number of these have declined or essentially gone away since the Cold War.

NARRATOR: Gregory Suchan is Director of the State Department's Office of Export Controls. Mr. Suchan suggests that the diplomatic corps' new hands-on approach to arms transfers is partly the result of budget cuts which have curtailed other kinds of diplomatic activities.

SUCHAN: As a result, and nobody ever intended arms transfers to perform this role, but as a result, arms transfer and a military supply relationship has become relatively more important in our bilateral and regional security relationships.

NARRATOR: A Decade after the Cold War, security assistance stands as one of the largest items in the foreign operations budget. The State Department is not alone in devoting a growing share of its attention, and its budget, to weapons sales.

PRESIDENT CLINTON: "...The era of big government is over..."

NARRATOR: Since President Clinton took office, the size of the federal government has slowly come down. But the number of federal workers engaged in promoting, financing, or otherwise facilitating weapons exports has increased--from about 5,950 employees in 1993 to more than 6,300 in 1997. For defense companies hoping to sell overseas, the list of available government contacts looks like the phone book for a small town. According to the World Policy Institute, the cost of this maintaining this federal workforce is about $410 million dollars per year.

GABELNICK: We're paying the salaries of these people who are then instructed to do the sales of these goods.

NARRATOR: The largest single agency devoted to the arms trade is the Pentagon's Defense Security Assistance Agency or DSAA, where 5,900 personnel in 74 countries administer roughly $12 billion annually in weapons sales. Since DSAA receives most of its funding from a 3% fee charged to all major sales, the agency has a strong incentive to maintain, or even increase, the current level of arms exports.

Even Joel Johnson feels the size of the DSAA could be reduced, since the arms industry and its customers are moving away from deals brokered through the Pentagon in favor of direct commercial sales.

JOHNSON: what you are finding is that the foreign customer is increasingly moving away from buying through the government. And, buying directly from the contractor. Because the governments tends to be expensive. ...the customer, he's beginning to say, but I want my best value for my money, and why am I getting hit with an extra three percent?

NARRATOR: The trend toward commercial sales of American weapons does reduce the need for large government bureaucracies to arrange the deals. But the government has all but stopped collecting the fees it normally charges on weapons sales, so the savings are passed on to the customer, not the taxpayer.

GABELNICK: The U.S. government is giving a lot of money for research and development in those industries. Originally that money was to develop weapons for the U.S. government to purchase. But now foreign governments are benefiting from that initial investment. They benefit from a lower cost. So they are supposed to be paying a recoupment fee that would go back into--for the research and development--that would go back into the U.S. treasury.

HARTUNG: ...there's no more recoupment fees on commercial arms sales licensed by the State Department, and on foreign military sales negotiated by the Pentagon, there's an option for the President to waive the fees. So in any given year... $500 million in recoupment fees basically are waived, allowed to go down the tubes, in the interest of helping promote U.S. arms sales.

NARRATOR: To recap the costs so far: $6.1 billion for security assistance, $410 million for personnel, and $500 million lost in uncollected fees. At just over $7 billion dollars per year, this is just the tip of the iceberg when it comes to the price we pay for the arms trade.

JOHNSON: You know, H billion dollars worth of sales is X thousands of jobs. And, I've never known an industry to say, gee, that's enough, we don't need any more of that.

NARRATOR: Proponents of arms transfers are quick to point out the economic benefits of selling weapons overseas, as did Vice President Gore when he announced an agreement to sell 80 F-16 fighters to the United Arab Emirates.

GORE: …this deal is good news for the American economy - it will mean up to 30-thousand jobs for our workers.

NARRATOR: But the economic benefits of arms exports are all but canceled out when defense companies offer technologies and business opportunities to their customers as part of export agreements.

HARTUNG: U.S. companies offer them offsets, which are basically a form of economic kickback where they say, "Well, in exchange for you purchasing our weapons, we'll generate economic activity in your country."

GABELNICK: That means a direct transfer of the production from the U.S. to that other country, which obviously is not good for U.S. workers. It could mean an investment in another industry, which has nothing to do with the defense industry... and that could be business that's competing with US companies.

JOHNSON: ...What you find is your large customers tend to want a piece of the action, in whatever industry you're looking at.... As to how much do you put off shore, how, what's the minimum you can do to make the customer happy so that you get the sale? If it goes beyond a point the government's comfortable with, we don't get an export license.

SUCHAN: The United States government doesn't give green lights to offset agreements. The U.S. government role is always to be at arms' length with regards to any offset agreement that an American company might conclude with a foreign government in the context of an arms sale.

NARRATOR: It is not unusual to find offsets in international business deals, regardless of what products are being traded. But sometimes the technology and facilities to produce high-tech weapons---technologies originally paid for by American taxpayers---are transferred to other countries along with the weapons themselves.

JOHNSON: who are our chief competitors? France, Germany, the UK. Israel, it's true that we paid for a good bit of that technology development, but that was a government call. A lot of it didn't come from U.S. industry, it came from US revenue to help pay, U.S. taxpayers' dollars to help that industry develop that technology.

HARTUNG: We've got 140 licensing and coproduction agreements around the world where U.S. weapons, everything from M-16 rifles to F-16 fighters are produced in foreign countries using U.S. blueprints, U.S. specifications, U.S. production equipment in some cases.

HARTUNG: So for example, there was a sale to Egypt after the Gulf War of F-16s and Egypt bought those F-16s with U.S. military aid dollars. Now the companies might say, "Well, yeah, but at least it creates jobs in the United States." But in this case, they decided to have most of the weapons produced in Turkey."

NARRATOR: In fact, Turkey is just one of 10 countries which currently produce the Lockheed-Martin F-16. Why would the U.S. government place such sophisticated technology in the hands of other countries? Political and military officials claim that arming friendly governments with American weapons and equipment is beneficial to both sides, allowing the U.S. military to work more effectively with its allies.

GORE: It opens the door to enhanced cooperation in training and operations. This inter-operability will give our forces a tremendous advantage in preserving the security and stability of the Gulf region to which we are firmly committed.

JOHNSON: ...when you buy U.S. defense equipment, you have equipment that's compatible with the US military, that you can train with our guys better, you can do joint ventures, you can do coalition warfare or coalition peacekeeping together. That's the strongest marketing support we get from our government.

HARTUNG: when it comes time to sell U.S. weapons, there's kind of a world view that says we're one big, happy family, everybody's a potential coalition partner, everybody's military needs to be able to operate in conjunction with ours; therefore, it's better that they have our equipment. But when it comes time to fight wars... our weapons end up falling into the hands of hostile forces. So in Panama and Iraq and Somalia and Haiti, even to a small extent in Bosnia, we've seen U.S. weapons end up being used against U.S. forces.

NARRATOR: American troops have already experienced firsthand the danger of providing U.S. weapons to unstable regimes. Many of the American weapons being exported today, especially tactical fighter planes like the F-16, are far more advanced than the ones faced by American troops in those earlier conflicts. In fact they are on par with much of America's own arsenal.

Such exports are justified by stressing the importance of sharing common equipment with other countries' militaries. But at the same time, the U.S. military prefers to stay a step ahead of the rest of the world in military technology.

As Dr. Hartung explains, when it comes time to debate the need for expensive new weapons systems for the U.S. military, the defense lobby's sunny view of the world suddenly changes.

HARTUNG: Well, I think the dirty little secret about U.S. arms sales is that we're running an arms race with ourself around the world. When Lockheed Martin tries to sell the F-22 stealth fighter to the Air Force, they pull out a little chart that says, well, look at all these countries around the world that have dangerous fighter capabilities. But it ends up more than half the countries on their list got their weapons from the United States.

NARRATOR: Of all the consequences of government support for the arms trade, this is easily the most expensive. In order to maintain our military's technological advantage, existing weapons in the American arsenal will be replaced with new systems costing billions of dollars more.

For example, the U.S. military will spend more than $300 billion dollars to replace much of its current tactical fighter fleet with a new generation of warplanes. If the military stuck with currently used models instead, it would cost about half as much to replenish the fleet, a savings of $150 billion dollars.

HARTUNG: We could use the current generation technology for decades to come if we weren't busy handing it out to everybody around the globe.

NARRATOR: For $150 billion dollars, the government could clean up half of the country's toxic waste sites. It could wire three-fourths of the nation's public school classrooms to use advanced telecommunications like the internet. The fact that programs like these may never receive full funding, is just one more of the many costs of the arms trade.

Some lawmakers, like Rep. Cynthia McKinney, believe that as the government cuts social programs in order to balance the budget, subsidizing the arms trade sends the wrong message..

McKINNEY: "I used to represent folks who don't even have running water in their homes... Yet we can give $7.6 billion away to the folks around the globe who know us by our helicopters, missiles, fighter jets, guns, and bullets. And the folks I represent have to conclude that welfare for weapons dealers is more important to the folks in this building than is their own human dignity."

NARRATOR: Support for weapons exports has also come under scrutiny in the business community. From a bottom-line perspective, the meager economic returns from the arms trade don't justify the risk, or the expense.

KLIGERMAN: ... Why are we spending such money to get a bigger share of a shrinking market?

NARRATOR: Alan Kligerman is Chairman of AkPharma, and the inventor of Lactaid and other nutritional aids. He is also a member of Business Leaders for Sensible Priorities, a group which actively opposes excessive spending on the military.

KLIGERMAN: …you and I, whether we like it or not, are carrying the weapons industry on our backs as if they were paralytics. We don't want this senseless thing to go on any longer. It is wrong in a human sense, and it is an economic disaster…

NARRATOR: But despite the cost, the criticism, and the fact that the global demand for weapons continues to decline, the government keeps working to open new markets to U.S. arms. The ban on high-tech weapons sales to Latin America has been lifted, and the NATO alliance, which requires its members to have state-of-the-art military equipment, is expanding into Eastern Europe.

HARTUNG: Given that these countries are not flush with cash, what we're going to see is that there's going to be more and more subsidies having to come in behind these sales.

NARRATOR: Major weapons contracts can stretch out over a decade or more, and a developing country's economy can undergo fluctuations in that time. The financial risk involved in selling advanced weapons to developing countries was made real just last year, when the government of Thailand had to back out of a contract for Boeing F-18 fighter jets during the Asian financial crisis. Production of the planes was already underway.

SUCHAN: So the United States worked with the Thai government, first to see if there was any way that the deal itself could be salvaged, and when it became clear that it wasn't, we worked with them on restructuring the debt, repaying what could be repaid, and as a result, the U.S. Marine Corps ended up with a bunch of F-18s.

GABELNICK: The U.S. decided to buy them ourselves, and give them to the Marines. Obviously, they weren't planning to make this purchase ahead of time, so they had to get supplemental appropriations and buy this very quickly. And it ended up costing taxpayers hundreds of millions of dollars, because Thailand got in over its head.

NARRATOR: Even when a developing nation does manage the costs of American weapons, the armaments do little to help the country's internal stability.

GABELNICK: Again, it's a long-term view that the U.S. government is not taking, by encouraging them , by pushing them to buy expensive U.S. equipment, they are not investing in the things that they really need to be, in their domestic infrastructure, their health systems, their education. And again, what that's doing is taking away other markets or the development of other markets for U.S. products.

SUCHAN: We take it seriously within the United States government. And what's more, the Congress takes it seriously as well.

NARRATOR: Gregory Suchan notes that members of Congress are free to challenge arms sales they view as risky. But holding up a sale supported by both the defense industry and the executive branch can be an intimidating, thankless task.

SUCHAN: …when a Congressman puts a hold on an arms transfer, 15 people from the State Department and the Defense Department, and probably 100 people from the firm, go up there and explain why this is good for U.S. national security, and good for the country that's going to receive it…

NARRATOR: The world market for American weapons has become unstable, and aborted deals like the one with Thailand may become more common in the near future. Fortunately for the Defense Industry, many orders which poured in after the Gulf War are still being filled, and the Pentagon is set to start replacing much of its equipment in the next few years. Perhaps the U.S. will be less aggressive in trying to conquer a shrinking world arms market. But that won't happen without changes in the government's approach to the arms trade. Bill Hartung explains why.

HARTUNG: there's a much higher profit margin on foreign sales because basically, they're selling a product that's already been researched and developed at taxpayer expense, sometimes at a government-owned facility that they are leasing at very little cost… Even if sales don't grow, there's a great incentive for companies to go for these deals because they are big profit-takers on those kinds of transactions.

JOHNSON: I don't see us walking away from defense markets that exist as long as our government permits us to pursue those markets.

ADMIRAL CARROLL: Government support for weapons exports has helped the defense industry profit in recent years, but you and I are footing the bill for their success. In the coming years, we will be asked to pay for an expensive new generation of weapons, to replace those we are already paying to ship to other countries. This type of aid to the defense industry locks America into an arms race with itself. Manufacturers export our best weapons, and then point to them as a threat which justifies building newer, more expensive ones. This is dangerous, costly, and patently unfair to American taxpayers. For America's Defense Monitor, I'm Admiral Eugene Carroll.