LOTTMAN: Okay, a couple of years ago, you published a monograph (inaudible) if I recall correctly, about $7-1/2 billion overall in quantifiable subsidies, which amounted to in the neighborhood of 25 percent of the global trade itself. (Inaudible) significant portion is directly subsidized by U.S. taxpayers. Since then, in updating that work, do you have a fresh set of figures or what kind of proportion we're talking about?

HARTUNG: Yes. We've been updating our work on subsidies for the arms trade and when we first did it a few years ago, the U.S. government was spending about

$7-1/2 billion a year subsidizing weapons exports, which was about half of the value of U.S. exports and about a quarter of the global trade. Now for '96 and '97, we estimate that it's gone up to $7.8 billion in U.S. government subsidies and that's about two-thirds of the value of U.S. sales for the most recent year.

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. It's just basically going out of our pockets to Lockheed Martin, to Boeing, to provide weapons to these countries.

And if that's what it's about, then we should have a political debate about whether that's how we want to spend our money. We shouldn't pretend that it's this great export earner or that it's this great economic benefit to our country because 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.

LOTTMAN: (Inaudible) there's a number of ways in which this funding is portrayed politically and that there's not a lot of debate about it, but in treaty obligations and military aid and that sort of thing. But you know, as I mentioned before, we can maybe illustrate that (inaudible) is put a homing beacon on somebody's tax payment that they send out into the IRS, it goes into the Treasury. What happens at that point, how might one of these programs work?

HARTUNG: Well, basically what would happen is, for example, the Pentagon has a program called foreign military finance, grants, loans for purchases of U.S. equipment. So basically, 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, and is not really a major factor in the economies of the recipient countries, except insofar as 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." But since the original money is coming from us, that's almost like a second cut on our tax dollar, our economic dollar, because these companies are providing their own subsidies to foreign arms purchasers, in addition to the taxpayer money that goes into these deals.

LOTTMAN: It's not unheard of in industrial exports or technology exports in general to offer these sorts of offsets. But is the weapons industry really getting preferential treatment (inaudible) in terms of government interference really being used to pry open, to maintain the status quo of what's really a dwindling market? How does that compare to other industries, what sort of potential for those programs to be effective?

HARTUNG: Well, I think the military industry does get a preference in terms of promotion from the U.S. government. President Clinton, Vice President Gore, former Secretary of State Perry, William Cohen, the current Defense Secretary, spend significant amounts of their time trying to convince foreign countries to buy U.S. weapons and we allow our companies to enter into offset arrangements where they can pay 50 percent, even a hundred percent or more of the value of the deal, they will put back into the recipient country in the form of various investments, production of U.S. weapons components in their country.

And so I think that's different from other industries in the sense that we're subsidizing this up front to the tune of half or two-thirds of the market. And then on top of that, we're letting our companies provide coproduction and offset benefits to the recipient countries. 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 because coproduces U.S. F-16s as part of their program of purchasing them from the United States. And Turkey's F-16 line is also subsidized by U.S. taxpayers. So basically, you've got U.S. military aid dollars paying for U.S. weapons being made in Turkey being used by the Egyptian Air Force. So there's very little, if not zero economic benefit to our country. It's completely an export of aid dollars and export of jobs.

And I don't think you see that kind of effect in other industries because there's no other industry that gets as much direct government taxpayer subsidy as the U.S. arms industry, unless perhaps you look at things like price supports for big agribusiness companies. But in terms of corporate welfare, these arms exporting companies are right at the top of the list.

LOTTMAN: About the exporting the technology they know about, the facilities to produce American models or American styles of weapons (inaudible). The development of that know-how is also subsidized by taxpayers, as you said, the military R&D budget or the general science budget. So I guess my question is do we get anything in return for this export of technology which we've made sacrifices to develop in the first place?

HARTUNG: Well, the U.S. government is one of the biggest net exporters of technology, of taxpayer financed technology, through its military programs. 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. And we used to get a small return from that in the sense of recoupment fees, which were supposed to be a fee that the purchasing country would pay to help write off some of the R&D costs that our taxpayers had undertaken to help develop these weapons in the first place.

But in the Bush and Clinton Administrations, the industry has successfully lobbied to scale back those recoupment fees, so 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, anywhere from $200 million to $500 million in recoupment fees basically are waived, allowed to go down the tubes, in the interest of helping promote U.S. arms sales. So even that small revenue stream that came as a result of these technology transfers has now been pushed aside by the industry.

So basically, on an economic basis, we're not getting anything back for giving out this technology and in fact, we're creating competitors both in military markets and in places like Japan, they're using U.S. offset agreements to develop a civil aerospace industry that could eventually compete with U.S. companies. So you know, as an economic matter, there's really no way to justify these kinds of deals.

LOTTMAN: The recoupment fee waivers, is that intended to lower the overall cost of the sale or is it otherwise, just to facilitate closing the deal itself?

HARTUNG: Well, U.S. industry sources have claimed that they need to waive the recoupment fees in order to have a level playing field with European countries and others who are selling weapons, but I think that's laughable. I mean in many cases, we're paying the cost, the entire cost of the deal, to begin with, so there's no need for an economic incentive. In other cases, the countries are interested in U.S. equipment for a variety of reasons and whether there's that little bit of a percentage knocked off the top is not going to make a difference.

I think basically what's going to happen is that money which is often three, four, five percent of the deal is just going to go into the profit margins of the arms merchants, it's not necessarily going to help the recipient countries. You know, maybe it will give them a little wiggle room if they're trying to sweeten the deal, but it's not going to affect the U.S. share of the market which is already averaging 40 to 50 percent. We're selling more than every other country combined and even the Pentagon has admitted we don't need more subsidies to expand the U.S. market share.

LOTTMAN: An interesting little sidebar, what is the trend in the global market? I know it peaked, I think it was back in '93, it was more than $30 billion. More or less, where does it stand today just in terms of overall volume of deals going on?

HARTUNG: The international arms market had been on a downward trend since the mid-'80s. Then it got a boost after the Gulf War when the U.S. sold over $30 billion in new weapons in '92 and '93. Now U.S. sales are down around ten, $12 billion a year, about a third of what they were after the Gulf War, and the global market has come down from 70 or 80 billion in the mid-'80s to 30 to 35 billion now. So you've got a market that's going down, the U.S. has already got about as big a share of it as it's going to get. And so that's why to some extent, these subsidies for weapons exports are really -- it's a dead-end market, there's not a lot of growth that's going to come. U.S. companies have already captured most of the markets they're going to get.

And so what you see is these absurd spectacles of trying to squeeze out a deal here or there Secretary of Defense Cohen pleading with Thailand to keep the eight F-18s that they were promising to buy or Lockheed Martin saying, well "Poland, if you buy fighter planes from us, we'll try to get you a hundred percent U.S. government financing and we'll give you a hundred percent offsets." So these can help the bottom lines of the companies, but they're not going to help our economy, because we're subsidizing them on the front end and we're transferring technology on the other end. So it's really, for U.S. taxpayers and U.S. workers, they're really the ones that are going to pay for these deals while Lockheed Martin is going to profit.

LOTTMAN: Getting back to your previous point, the industry states that roughly 25 percent of its business is in the export market. But is it true that it's a disproportionate share of their actual profits from the export market?

HARTUNG: Officials of some of the companies, like McDonnell Douglas, which has now been absorbed by Boeing, and some analysts of the industry have said that 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 in a government-owned facility that they're leasing at very little cost. They've already gotten the bugs out, to the extent that they ever get the bugs out of these systems. So it's at the end of a production run, it's a mature product. And they can also do a lot of add-ons, they have no kind of limits on what kind of extra spare parts and training they can put on foreign deals, what they can charge for them.

Whereas, in a deal with the Pentagon, there are some limits; granted they're high limits, but they're still limits. It's like Wolfgang Demisch, who analyzes the defense industry on Wall Street, the Office of Technology Assessment when it did a report on this a few years ago said that in some cases, the margin on a foreign deal can be 30, 40, 50 percent greater than on a domestic deal. So that's why even though it's a small share of the world market, even if sales don't grow, there's a great incentive for these companies to go for these deals because they're big profit takers on those kinds of transactions.

LOTTMAN: It just occurred to me recently that a lot of these deals are justified by this concept of interoperability, if we all have the same stuff, we'll be able to fight together better with our allies. At the same time, people talk about a boomerang effect in terms of where your enemies end up with your weapons. But it seems to me that perhaps a more nefarious boomerang effect is that when it comes time to debate a new weapons system, they'll throw up a map of the world and say (inaudible) whatever allies the United States already have our best technology, so we need to go to the next generation (inaudible).

And so I'm just wondering if you've ever dealt with that contradiction specifically or second of all, if you've given a lot of thought to what would happen in the industry or what would happen in the arms trade in general if these subsidies were eliminated, what would the impact of that be?

HARTUNG: Well, 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, it ends up a lot of the countries that we have sold weapons to on the basis of being cooperative allies that can join coalitions with us end up turning against us or 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. So there's sort of a boomerang effect that comes about from these arms sales which is never discussed when the deal's being considered.

But 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. So at a minimum, we should have more scrutiny about who we're selling to, there should be some standards about not selling to dictatorships, not selling to governments that violate the human rights of their own citizens, engage in aggression against their neighbors.

And in fact, there's a legislation in the Congress, the Code of Conduct Bill, that would set those sorts of standards. And I think if we had standards like that and we limited these subsidies, we would find that the U.S. would still have an arms trade, maybe about half what it is now, but we'd be much less likely to see our arms used against our own troops, see them fueling civil wars, see them in human rights abuses. I think the American public would feel a lot better about the role we're playing in the world than now, where basically not only are we the world's leading arms merchant, but our weapons are fueling conflict, being used in repression and we're paying for it. I don't think that combination is really something that the public should sit still for if they take a careful look at how this trade is being conducted.

LOTTMAN: Okay, about this conflict between interoperability and the need to have technological superiority to create constant pressure for more newer or more expensive weapons, even though there's really no global demand for (inaudible), so do you think (inaudible) impact on the industry overall just in terms of containing these costs? Because one theory is that the root of the problem is just cost, political protection (inaudible), signing on of contractors and adding all the bells and whistles to things which just drives the cost through the roof, America can't even afford America's weapons any more, much less other countries. So do you think it might have that sort of impact as well (inaudible) through the industry in that sense?

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. And the Air Force even has terminology about the gray threat, countries that are friends today that could be enemies tomorrow. So therefore, any arms sale now becomes a reason for us to jump to that next level of technology.

So if we could limit our subsidies for arms sales, be more careful about who we sold to, get that trade under control, we'd have a better chance of actually limiting the escalation of our own arms technology. If we'd stop having that arms race with ourselves, we could have current generation weapons that were better maintained, that were more affordable; we wouldn't have to keep going up the cost scale to where, now, an F-22 is going to cost $160 million a copy. We could use the current generation technology for decades to come if we weren't busy handing it out to everybody around the globe.

So one of the positive impacts of limiting the arms trade is we could slow down the pace of our own military modernization and our arms buildup. And we had more to say about that at the end of the cold war than we had at any time in recent history because there is no major enemy spending the kind of money we're spending, building the kind of technology that we're building. So if we don't give this stuff away, countries are not going to get it any time soon.

LOTTMAN: This just occurred to me. Are you aware of any extent to which either collusions or formal business agreements or even mergers are going on between American defense manufacturers and companies overseas? You know, it's sort of a new can of worms, but it just occurred to me that as our rapid modernization relative to the rest of the world is creating pressure particularly on our NATO allies to raise their military spending so they can keep up so -- because they don't want the U.S. taking a hundred percent of the responsibility for NATO defense, either. But on the other hand, they're not overanxious to increase military spending, so the politics of this seems to be taking on some (inaudible) in terms of creating pressure for more weapons and more military spending, where no threat or no such pressure exists (inaudible)? So is the industry, this is the question.

HARTUNG: Well, the U.S. military industry has already consolidated dramatically, domestically. We're down to three big companies, Lockheed Martin, Boeing and Raytheon. Now they're looking to Europe. Lockheed Martin wants to partner with British Aerospace on the joint strike fighter. Boeing and Lockheed Martin have already made agreements in Poland and the Czech Republic and Textron has one in Romania to buy significant parts of arms companies there to use that as a base to export to Eastern Central Europe. There's alliances in Argentina and Greece, all over the globe, where these companies have these partners that they've gotten either as a result of coproduction agreements or as a way to sort of present themselves as a local company when they're trying to sell to those markets.

So what that means is not only does it globalize production, I mean that there's less production likely to happen in this country, but it also globalizes that kind of pork barrel politics. And so if you've got a company like Lockheed Martin lobbying to lift the ban on arms sales to Latin America, it's much more likely that's going to happen, and it has happened. If you've got a company like Lockheed Martin lobbying not only here for NATO expansion, but also lobbying in Eastern Central Europe, where the governments are less powerful, have less resources, they're going to have a much better chance of getting what they want if they can work both ends of the problem.

They can lobby the governments of Hungary, the Czech Republic, Poland, also lobby here in Washington, which they're very skilled at doing. And if they've got international partners to help them, then I think you have the prospect of kind of a global military industry that really is more attuned to its own interests than to the national interests of the various countries where it does business. So in that sense, it's more like a traditional multinational corporation.

And so to the extent that the defense industry says "We're different from other companies we're made in the USA. On national security grounds, we're going to do business here first," all that has gone by the boards now in this new globalization of the military industry.

LOTTMAN: You mentioned the (inaudible) -- two more quick questions. You mentioned the end of the ban on sales to Latin America, also trying to open up the Central European market. Clearly, you're talking about trying to sell weapons to countries that can't afford them. Is there a possibility that that could cause a level of subsidies (inaudible)?

HARTUNG: In the past year, the Pentagon has opened up a couple of new markets. They've lifted the ban on selling fighters to Latin America, they're starting to do subsidized sales to Eastern Central Europe as a part of NATO expansion. 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.

There's already 19 Eastern Central European countries or former Soviet republics that are now getting U.S. military aid. Two out of every three countries on the Pentagon's aid program are now potential NATO members. We've got a $650 million loan fund that's going to go to sell defense equipment to Eastern Central Europe. We've got a $15 billion taxpayer guaranteed fund that's already been used to sell equipment to Romania. In Latin America, Argentina's been declared a near NATO ally as sort of a consolation prize for the fact that they can't afford the F-16s that we're going to let Chile buy. And that means they're going to get free equipment through the Excess Defense Articles Program, they could eventually get into some of these loan subsidy programs as part of that.

And so basically, even these new markets that the industry is kind of talking about as wonderful business opportunities are likely to take that $7.8 billion in subsidies that we're already giving to arms exports and push it through the roof. And so if we don't get a handle on these things now, we could wake up five years from now and find out we're spending $10 billion a year subsidizing weapons sales, instead of 7.8. And so I think the time for the Congress and the public to really get after this is now, so that we don't find out a few years from now that a few billion dollars a year of our money sort of disappeared into this more or less bottomless hole of arms exports.

LOTTMAN: One last question. It seems an odd kind of way to finish, but clearly, some of these programs deal with treaty obligations and in a lot of ways can be considered __________. Also, it's important to have a viable defense industry in whatever form that can take (inaudible). So are there programs that are being looked at and do you find that you do support them or don't support them (inaudible)?

HARTUNG: Well, I think -

LOTTMAN: Or is it your opinion that all these subsidies (inaudible)?

HARTUNG: I think our goal should be to phase out all of the subsidies for arms sales, but I think it will have to be done over time. I think our commitments to Israel would have to be dealt with in the context of progress on Middle East peace or likewise with Egypt. I think some of our commitments to NATO, not just NATO expansion, but NATO allies, likewise should be sort of ratcheted down in connection with discussing new security arrangements for Europe. I think our arms sales in Asia should be geared to a different kind of look at Asian security.

So I don't think you could just take this $7.8 billion in subsidies and eliminate it tomorrow, but I do think if we had more forward looking security policies about how to cooperate with allies in reducing the threats to our interests in the future that we could, over a five-, ten-year period, bring them down to zero or close to zero. And I think that would be a reasonable goal, as long as those reductions are in synch with some kind of change in our security arrangements in various parts of the world.

So I have no objection to arming U.S. allies for defensive purposes, for specific peace keeping initiatives, but I think what we have now is just kind of an open checkbook for arming virtually anybody for almost any purpose that the companies and the Pentagon put forward. And I think if we had stricter standards about who we sold to and if we had new alliances that were more reflective of the post-cold war world, we could still have some sort of exports of defense equipment, but they would be for a much more obvious purpose and it would be a much less expensive program than what we have now.