Supplying the Latin American Military

September 25, 2007

It is notoriously difficult to gather accurate, reliable data on arms grants and sales to Latin America, but the evidence seems to indicate the following: (1) the U.S. mili- tary establishment is the largest supplier of military equipment to Latin America through direct grants and sales of U.S. arms; (2) U.S. commercial companies backed, guaranteed and usually financed by the U.S. military establishment are the second largest supplier of military equipment to Latin America; (3) the U.S. military establishment, selling U.S. equipment to the Latins by way of its NATO allies, especially West Germany, is the third largest supplier; (4) the fourth largest supplier is also the.U.S. military establishment, selling U.S. equipment through U.S. and foreign commercial firms located in NATO coun- tries, again primarily in West Germany. Who is fifth? The French selling French equip- ment. And sixth? The British selling British equipment. And so on. How does this vigorous competition for the top six positions work? The primary agency for coordinating arms sales from the United States is the International Logistic Negoti- ations office (ILN), established in 1961 as a separate office in the Defense Department, under the able direction of Henry J. Kuss. Mr. Kuss publicly "pledged" himself to a goal of $1.5 billion per year in arms sales and arranged his sales force of 21 profession- al officers into four teams -- red, gray, blue, white -- each charged with particular areas of responsibility. So successful was Mr. Kuss in boosting military sales -- run- ning a 600 percent increase in annual military sales abroad over the levels of the 1950's under Dulles and the Cold War -- that in 1964 the Johnson administration promoted him to the rank of Deputy Assistant Secretary of Defense. It would be only fair to describe the ILN's approach as alert, dynamic and aggressive. It has engaged the cooperation of the industrial and financial community through the Mil- itary Export Committee of the Defense Industry Advisory Council in trying to expand over- seas military sales. The Defense Department has appealed to the U.S. armament industry to "go international." In a speech to the American Ordinance Association in October 1966, Mr. Kuss chastised companies who were dragging their heels: This tendency of American companies to refrain from entering into the international arms market is a serious one and affects our entire international posture in a military, economic, and political way.... From the political point of view, in- ternational trade is the "staff of life" of a peaceful world. With it comes un- derstanding; the lack of it eliminates communications and creates misunderstandings. In addition, the Defense Department is organizing symposia throughout the United States which will try to convince the smaller arms manufacturers, the "non'bigs" as they are called, of the benefits to be gained from entering the military export market. * * *-5- How does Latin America get its fair share of arms? The first kind of military "aid" to Latin America from the United States comes in the form of direct grants. This includes equipment and credit covering major armaments, "internal security," supply operations, civic action (generally one-tenth of the "in- ternal security" allocations), and so forth. In recent years, these grants have been running about $55 million annually, but this figure does not include training for Latin American military in the United States and the Canal Zone (in this regard, see the re- vealing summary in "U.S. Military Operations/Latin America," NACLA Newsletter, October 1968), which would be another $13-14 million each year. Nor does it include the costs of U.S. military operations, establishments, and expenditures in the various Latin American countries. The above figure also excludes the growing sums of money being allocated to the military, police and intelligence through the Public Safety Program of AID. And, needless to say, it excludes CIA expenditures. Finally, it does not in- clude the portion of counterpart funds generated in local currency by sales of the Food For Peace Program (P.L. 480), which is required by law to be used for military expenditures [Sec. 104(c)]. The Defense Department, of course, submits no composite reports to Congress on what it sells abroad or even how the Military Assistance Credit Account is used. Nor are the counterpart funds from the Food for Peace Program which are spent on military forces adequately accounted for. Nor, I believe, are the funds for the Public Safety programs of AID. It is therefore almost impossible to gain a comprehensive idea of the true size of the total military grant program. The largest growth in the past decade, however, has not been in grants, but rather in direct sales of military equipment. The key to this process has been the expansion of U.S. credit assistance. For example, in addition to the grants mentioned above, the Defense Department sold in fiscal 1966 roughly $56 million in arms to Latin America. Of this, only $8 million was for cash. It has been suggested that this seven-to-one ratio of U.S. credit to cash is probably common throughout the underdeveloped world. How does this process work? Again, the ILN office in the Defense Department has acquired the sole responsibility for negotiating the terms of credit extended for mili- tary purposes. This process of arranging credit was initiated in 1957 when $15 million was authorized. But in the Foreign Assistance Act of 1961 (Sec. 508), the Military Credit Assistance Account of the ILN became a "revolving account" -- that is, repayments of loans were accumulated in the account and were required by law to be used for fur- ther financing of military supplies. Thus, although yearly appropriations ranged from a mere $21 million to $81 million per year, the account has grown to over $300 million. As if this were not good enough, in 1964 the Defense Department requested, and Congress passed, a measure giving Defense the authority to guarantee 100% of the credit expended by U.S. banks for arms sales while obligating only 25% of the amount as a reserve to back up the guarantees. In other words, the $300 million-plus in the ever-increasing "revolving account" allows the Department of Defense to put the full guarantee of the U.S. government behind over a billion dollars in military credits. At the same time, the Defense Department gets money to loan from the Export-Import Bank (Ex-Im Bank) through what are called "country-x loans." The Ex-Im Bank does not have any knowledge where this money goes -- the Department of Defense arranges the loans on its own terms with whomever it wants and then goes through the formality of guarantee- ing the country-x loans to the Ex-Im Bank. This process came under criticism last year when the President of the Bank admitted publicly that he had no idea where all this money went or what it was used for. The Senate passed a resolution to repeal Defense's authority to guarantee commercial sales, but the House voted it down. Finally, as has been suggested, private U.S. banking facilities play a large role in financing U.S. military exports. According to the Military Export Reporter, a tradejournal for U.S. contractors in the arms business, about 36% of all arms sales during 1962-1965 were financed by private banks. It is no secret that private banks do not participate in such loans, especially with regard to the underdeveloped countries, without full guarantee of repayment. Again, it is the Department of Defense that makes this guarantee. In this process, the ILN can extend its own credit terms at its dis- cretion, including a zero interest rate. Thus a "package loan," including Defense and Ex-Im Bank backing and commercial credit terms, can be arranged at very low overall interest rates, while the private banks, on their share, get the usual high returns. It has been occasionally suggested that arms merchants are in a highly speculative business but the truth, especially with regard to Latin America, is that arms loans are the first paid and the last reneged-on. ITT may be expropriated in Brazil, but only a Castro would refuse to pay back arms loans to Batista. And it is safe to say that the policy of the military establishment does not allow for many more Castros. Coups and counter-coups give Latin American politics the air of instability, but com- mercial loans for arms always get paid. Financing arms sales is the safest business there is. It is also often argued that if the United States didn't supply the Latin American military needs, those countries would simply turn to Europe. But the French and Brit- ish sales operations are purely commercial. Their financing is much more expensive for the receiving countries, especially in short-to-middle-term foreign exchange costs, than arrangements with the United States. Our sales through the Defense Department make available easy and inexpensive hard currency credit -- this prevents any conflict between the military and the commercial or industrial upper classes over the division of scarce foreign exchange -- with facile renegotiation of debt and with guaranteed cordial relations in the international banking community. How do the NATO countries figure into the sales of U.S. arms to Latin America? The largest source is West Germany. The United States has insisted that the West Germans buy approximately $800 million in arms per year (instead of giving us a cash sum) in order to offset the cost of maintaining U.S. troops there in the Federal Republic. Increasing amounts of these arms, through governmental and private commercial channels, are being sold in a "two-step" process to the underdeveloped countries. In fact, there are doubts about whether this is even a "two-step" process -- no official figures exist, of course, but there is much evidence to suggest that formal entries appear in the West German accounts but shipments are made direct from the United States. Other arrangements are even more complex -- the American F-86's which Venezuela bought from West Germany about two years ago, for example, were manufactured in Italy under a U.S. licensing arrangement. It is extremely difficult to trace through all the U.S. military activities in even so "open" a field as commercial sales, let alone covert activities. Any additions, amend- ments or corrections to what is presented here would be greatly appreciated. * * * There are four basically good studies which any researcher should start with, and on which this article is heavily based: * "Arms Sales and Foreign Policy," staff study, Committee on Foreign Relations, U.S. Senate, January 25, 1967. * "The Latin American Military," Study of the Subcommittee on American Republics Affairs of the Committee on Foreign Relations, U.S. Senate, by Edwin Lieuwen, October 9, 1967. * "Arms to Developing Countries 1945-1965," by John L. Sutton and Geoggrey Kemp, In- stitute for Strategic Studies, London (Adelphi Paper 28), 1966. * "Armed Forces in Central and South America," by David Wood, Institute for Strategic Studies, London (Adelphi Paper 34). 1967.

Tags: military grants, arms sales, DOD loans

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