Thank you Remy and Dak, and thank you to the members of the Aerospace Industries Association for providing the opportunity for me to share with you recent assessments as well as on-going efforts important to the viability of our economic security and national security. The Bureau of Political-Military Affairs (PM), along with counterparts in the interagency, is closely tracking the impact the COVID-19-related economic downturn is having on the U.S. defense industrial base and allied defense budgets around the world.
We understand you are feeling the pain acutely, and in many cases, there is a financial imperative for defense contracts to cover revenue gaps. PM is doing everything we can to help industry adapt and overcome the impacts of COVID-19, and I will walk through some of those details of where we are applying greater discipline, and seeking further efficiencies and opportunities beyond a pandemic posture and toward recovery.
As you are well aware; export markets are more valuable than ever to companies’ bottom lines. Recognition of this fact led the Department of Homeland Security to designate defense industry personnel involved in foreign arms sales as essential workers in late April. As the Department of State’s lead for providing foreign policy and regulatory oversight for defense trade and Foreign Military Sales, PM is perfectly positioned to leverage our expertise and connections to support industry through these trying times.
Before addressing what PM is doing to support the domestic defense industrial base in response to COVID-19, I want to talk about something I know is on all your minds: the status of foreign partner defense procurements. PM is closely tracking indicators, the developing trends, and reporting on defense budgets around the world and actively engaging with our partners and allies to the extent possible in a virtual environment. We have also leaned on our teams at U.S. missions around the world to gather feedback about local conditions and assess apertures where PM’s involvement could be constructive.
Preliminary reports from the field suggest the scope and nature of defense spending cuts vary widely between regions, from nominal declines in line with GDP decreases in Western Europe and Northeast Asia to large cuts an order of magnitude greater than the underlying economic contraction in some of our Middle Eastern and South Asian partners. Defense budgets in countries hard-hit by COVID-19 – or in those nations which took drastic measures to prevent wide-scale infection – have in most cases declined significantly versus pre-pandemic spending forecasts.
Worldwide, PM is noting there is a “do more with less” ethos taking hold amongst defense establishments, with the majority of partners still suggesting their readiness levels and training will not decline in the face of negative budgetary pressure; however, acquisitions and modernization plans will be particularly affected by the decline in available funding. So far, PM does not see a broad trend of delayed payments or refusal of deliveries of commercial defense exports, but if your companies do experience such situations please reach out to my team so that we can add those data points to our engagement with foreign partners.
Turning to PM’s support for the U.S. defense industry, as you are all likely aware by now DDTC recently took a number of steps to support the U.S. defense industrial base (DIB) in the context of the COVID economy. These include:
Temporarily reduction of registration fees for DDTC registrants in Tier I and Tier II to $500 for registrations whose original expiration date is between May 31, 2020 and April 30, 2021. Also, DDTC is reducing registration fees to $500 for new applicants who submit their registration application between May 1, 2020 and April 30, 2021.
Also, DDTC extended those ITAR registrations expiring from February to June for two months.
A temporary suspension, modification, and exception to the limitations on the duration of ITAR licenses contained in ITAR Parts 120-130, including but not necessarily limited to ITAR §§ 123.5(a), 123.21(a), and 129.6(e), to extend any license that expires between March 13, 2020 and May 31, 2020 for six (6) months from the original date of expiration so long as there is no change to the scope or value of the authorization and no Name/Address changes are required.
The Compliance office also established a new process for industry to electronically submit disclosures and related information. Compliance is granting an additional 30 days for responses to disclosure-related matters and is considering extensions for the submission of full voluntary disclosures on a case-by-case basis.
A temporary suspension, modification, and exception to the requirement that a regular employee, for purposes of ITAR § 120.39(a)(2), work at the company’s facilities, to allow the individual to work at a remote work location, so long as the individual is not located in Russia or a country listed in ITAR § 126.1.
Earlier this month we issued a Notice of Inquiry (NOI) via the Federal Register seeking additional feedback from industry and the public on these measures, and advice on what further measures might ease the impact of the COVID economy on the DIB and partners at this time. If you have yet to provide feedback, today is the deadline.
As for seeking legislative relief, in the FY21 Congressional Budget Justification (CBJ) the Trump Administration made two legislative requests of Congress we proposed last legislative cycle, current events have only made the proposals more important. These are, an FMF Loan Authority, and, an expansion of DDTC Fees flexibilities.
The economic downturn related to COVID-19 is also affecting our partners’ ability to pursue the full range of security requirements, including sustainment, and modernization, that the United States is best positioned to support through defense sales. However, the United States has extremely limited financing options, even when we are not in the midst of an economic crisis. The Department cannot legally offer loans through FMF authority and the Export-Import Bank (EXIM) is prohibited by statute from securing loans and financing for arms exports, putting U.S. industry at a disadvantage with foreign competitors.
An FMF Loan Authority and Loan Guarantees for NATO and Major Non-NATO Allies– would provide an additional tool for our partners to fulfill their valid security requirements and deepen security cooperation with the United States. The ability to offer financing would make Foreign Military Sales more attainable for qualified partners and would help the United States be more competitive in the global defense market, where our competitors currently have a significant advantage with respect to lending. It would not be a substitute for security assistance funding. With the current pandemic posture, including defense budgets and planning adjustments, we may have partners who want to continue forward with a significant defense article purchase but can’t do cash payments, but a loan option could keep a case going. We are actively engaging with our committees on this legislative proposal.
Our other proposal on DDTC fees flexibility would enable the Department of State to spend more of the funding accrued through the fees we collect in direct support of the Defense Trade Controls enterprise, reducing the burden on the federal taxpayer and increasing our ability to maintain operations during any interruptions to appropriated funding.
As already shared with many of you in various fora, we continue to seek efficiencies and opportunities to apply further discipline throughout the U.S. government as well as refine and reform processes. The march toward recovery requires collaboration, and I welcome candid discourse on what else we can do to support America’s industry and our security cooperation partners. Happy to open the floor for discussion and questions.