LOTTMAN: Can you give a description oif what happens when a country enters into an arms transfer agreement and then, somehwere down the road, finds that it just can't pay for the full cost of the agreement.

GABELNICK: I think I'll answer the question by giving the example of Thailand, if I can. Thailand, along with the other nations of Asia hit this financial crisis, and this past spring, a year ago, decided that they couldn't afford about $390 million worth of F-18s. And while they had already made a down payment, they were really responsible for the purchase of these planes. So they scrambled about looking for someone else to buy them for them. I mean, they are legally and financially obligated to pay, I think it was up to $250 million of that, so they can't just get off the hook.

But becuase the US felt that we were, you know, very close allies, and we wanted to do them a favor, when they couldn't find another buyer, the US 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.

LOTTMAN: You say they are legally obligated to make the full payment. How did we end up with $14 billion of accumulated military debts? We continue to loan money to those customers...

GABELNICK: Well, maybe legal in the international sense is not the same word as it is under--domestically, so, we're not gonna take them to court. And it's part of our overall policy that in building close ties with militaries around the world that we are fairly generous with these loans. I don't think we would give them in the first place if somewhere in the backs of the minds of the officials that gave them, knew that we could end up paying for them ourselves.

LOTTMAN: The $15 billion loan guarantee fund--I've been hearing some conflicting things about that. There's a group of countries who are sort of high credit risks who this program is targeted toward, but because of the Bumpers amendment, they have to make a cash payment up front. Now, Joel Johnson claimed that that effectively killed the program... Since it's been enacted, have there been transactions where the existence of that program was actualll a factor that went into it.

GABELNICK: When it was started --it was created in November 1996, and there were several nations that expressed interest. And I think what deterred them from ever using it, and only one nation ever has in the past two years, were these prohibitively high fees. The fees were intended to protect the US taxpayer from footing the bill for even more debt. So the fees are intended to cover both the risk of default, and that risk varies according to the risk level of that country. They're not all high-risk countries. But if they are high risk, then they pay more money. The fees also cover the operating costs of the program. And so most of the countries that were deemed eligible for this program decided that it wasn't worth it for them. But on the other hand, it would be inadvisable to have a defense export loan guarantee program such as this that wouldn't be auto-financing in this way. Because otherwise you're risking $15 billion in debt to fall back on the U.S. taxpayer.

LOTTMAN: What kinds of legislative or administrative initiatives or changes do you think would be most constructive in addressing the costs of the arms trade to the U.S. taxpayer?

GABELNICK: They range from fix-it items to much broader legislation that would help control arms exports in general and all of the support that goes into those programs. Some of the smaller fixes might be recoupmrnt fees for research and development costs that... 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 US 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 US treasury. They have been either waived from paying a lot of these fees, or they've been negligent--the US government has been negligent in collecting these fees. So making sure those fees are collected would be one way to get some of the money back.

LOTTMAN: ...new legislation restricting chronic debtors from federal loans

GABELNICK: It's a good idea... What they will be doing, hopefully, is ending this Defense Export Loan Guarantee Program. When the GAO produced its report at the end of last year, they recommended many changes to the program. The Defense Department, in response, said, you know, we might as well cut our losses, and are gonna propose legislation which recommends termination of the program. So I think that would be a first step in getting rid of subsidies for $15 billion worth of loans. It's not being used, and it's actually fallinng into debt because they can't even pay the costs of the program because there has only been one $17 million loan, to Romania.

Do you want me to talk more generally about arms control programs?

LOTTMAN: Please.

GABELNICK: Well, I think a good way of getting at this problem indirectly would be an arms transfer code of conduct. And there is currently legislation that's about to be introduced by Reps. McKinney and Rohrbacher, and it would prevent arms sales to countries that are non-democratic, that are engaged in human rights violations against their own citizens, that are engaged in acts of armed aggression, and that do not participate in the UN conventional arms register. And while it wouldn't actually prohibit the sales, because the US could then issue a national security waiver, it at least would, what we're hoiping is that it would dlow down the sales to the most flagrant cases of human rights violators , dictators.

Now what I mean by indirectly is how it would come back to the US taxpayer is, first of all, if ti cut down on the level of overall sales, then you're cutting down on the amount of time and energy and money that's being paid to people who are processing these sales. That's one way.

But it's also, the countries that would be affected by this, by the Code of Conduct, are countries, take the example of a dictatorship. The leader of a dictatorship is more interested in buying fancy high-tech weapons than he is in investing in his own population. And a policy like that, over the years, could lead more to civil unrest, it actually pose strategic threats themselves, because they don't have a population that's educated enough or strong enough to defend themselves. And they also generally have a weak economy that won't be good for our other economic interests which are to market to developing countries. So, and countries like that eventually turn to the US either for economic aid, of there's some outbreak of conflict the US could be called in in a peacekeeping capacity, or other ways that it comes back to us financially. So in addition to just not wanting to sell US arms to human rights violators, there are also financial reasons for a code of conduct.

LOTTMAN: So the boomerang effect could apply financially as well as in terms of military dangers.

GABELNICK: Iraq is a great example. I mean we sold them lots of arms in the 80s... They were involved in a war, but they were spending so much money on their military that they had an enormous economic crisis. Some would argue that the reason Iraq or Hussein went to war against Kuwait was that he needed some distraction for his population, who had terrible economic problems.

LOTTMAN: There's the code, there is ending the Loan Guarantee Fund, and recoupment fees. What other intiatives that are priorities for you?

GABELNICK: Well, one of them would be the topic of offsets. Offset agreements accompany a lot of the larger arms sales. It's a way to offset the heavy costs of some of these arms sales by letting, by requiring that the US company, the supplying company, invest in the recipient company. And that can be in many variety of forms. It can be in direct offsets, which would be actual production in that country, and that means a direct transfer of the production from the US to that other country, which obviously is not good for US workers. It could mean an investment in another industry, which has nothing to do with the defense industry. But what the recipient country wants is a way to show that they're actually getting something in return for spending tens of millions or hundreds of millions of dollars on this equipment.

So, an investment in any kind of other industry would mean that you're, you're trying to create business for that industry, and that could be business that's competing with US companies. And it's a hard thing to really gauge, because you don't know exactly how many jobs are lost because we're improving the industry of these other countries. And it's not to say that the US should never do any investment abroad. It's just that the defense industry is not the organization to do that. It's just not efficient.

The whole idea that, the defense industry likes to say, that this is about so much money and so many jobs, is really a fallacy. Because about half of the money that goes into the industry's coffers is again sent abroad in the form of these offsets. These offsets really need to be taken into consideration when the US approves future exports. So that would be another legislative initiative--to at least make the offset public at the time that Congress is informed about an upcoming sale.

LOTTMAN: What about the limitations on exports to Latin America?

GABELNICK: Again, it's a long-term view that the US government is not taking, by encouraging them , by pushing them to buy expensive US 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 US products. It also in the long term could lead to more domestic unrest and instability in a region that we obviously have a strategic interest in maintaining stability. So that's how I see in the long run it could come back to us. We also are giving them direct military financing and loans. By reducing that, that's gonna help reduce the immediate bill.

In Colombia, we just approved this $300 million for counter-narcotics aid in Colombia, and that includes a lot of military equipment, either excess or new equipment. And it's not just the first-time purchase of this equipment, it's the maintenance of this equipment. Colombia's just not in a position to maintain it themselves. And it's also getting us invloved because of who we give it to or who we say it should go to in the counter-insurgency war, which we have not declared as part of our policy and I think is not advisable.

LOTTMAN: ....Not just financial support, but the people in the employment of the government acting as marketers or agents for these kinds of deals.

GABELNICK: The Clinton Administration has become the best salesman of the defense industry. They have instructed their personnel in overseas missions to actually push for US arms sales. So what better marketing strategy could you have, than to have the US government doing your bidding overseas. And so, again, we're paying the salaries of these people who are then instructed to do the sales of these goods. And also there are air shows, international air shows, that US personnel have been participating in. The personnel and the US government is footing the bill to put US equipment there or to fly overhead in apparent training missions. And again all that is taxpayer money.

LOTTMAN: What sort of trends do you see with the volume of the trade compared to the cost to taxpayers.

GABELNICK: The US taxpayers pay for about half of the cost or what the defense industry receives in return for that money. And the numbers aren't expected to change much. So, about 50% is paid for by taxpayers.