WASHINGTON ― Economic shock waves from the coronavirus pandemic are threatening U.S. arms sales to its allies and partners, who may suddenly have less to spend.
U.S. defense exports, through either the Foreign Military Sales process (which is government-facilitated) or the Direct Commercial Sales process (from a firm to a nation), are a means for the U.S. to strengthen ties with friendly countries and, as President Donald Trump likes to make explicit, pump revenue into the U.S. economy.
Though the U.S. made $55 billion in foreign military sales in fiscal 2019, observers see headwinds in declining oil prices and the potential for allies to prioritize their domestic response to COVID-19 over defense spending.
The Middle East is a leading market, and Saudi Arabia the world’s leading purchaser. But the falling price of crude oil has fueled projections that Gulf Cooperation Council budgets will shrink, and with them demand for U.S. weapons. To boot, a Saudi-initiated oil price war has only added to Capitol Hill’s ire toward the kingdom.
Arms sales to Saudi Arabia reentered Congress’ crosshairs as lawmakers probed Secretary of State Mike Pompeo for firing of a State Department inspector general who’d been investigating Pompeo for bypassing a congressional freeze on arms sales to the kingdom. Previous objections to the sale centered around Riyadh’s role in Yemen’s civil war and — U.S. intelligence agencies believe ― the death of columnist Jamal Khashoggi.
“I think the trends are a bit worrisome,” Roman Schweizer, the managing editor of Cowen Washington Research Group, said during a Defense One event. “The Saudis have been in the penalty box with the U.S. Congress since the Khashoggi killing, and most recently with the overproduction of crude oil. ... So getting a deal though the U.S. Senate for the Saudis are probably a bridge too far.”
Within NATO and the European Union, allied purchases of U.S. equipment have been lagging, as Trump has jousted with leaders in Western Europe, Schweitzer said. At the same time, allies nearer to the border with Russia have been buying U.S. arms more heavily.
In the long term, tensions with Russia and China are still likely to drive demand, observers say. China ― the Pentagon’s pacing threat ― is raising defense spending by 6.6 percent in 2021 even as it cuts education and public services.
“The growth rate may have slowed, but the fact the budget increased is still a significant indication of the focus and prioritization that the [Chinese Communist] Party puts on modernization plans and national security interests,” Meia Nouwens, an expert on Chinese military affairs with the International Institute for Strategic Studies, said at the same event.
For now, it’s unclear whether COVID-19 will turn Europe’s focus away from burden-sharing, said Edward Ferguson, a former British ambassador now serving as minister counselor for defense at the U.K. embassy.
What is clear: European governments will have to have difficult conversations.
“Right now within NATO, what we see are allies proliferating rather than reducing,” Ferguson said at the event. “Notwithstanding the additional demands on treasuries and exchequers is the fundamental shifts in technologies we’re seeing and [the] need to invest in that, and the increasingly complex strategic environment, whether it’s Russia or China. "
Along similar lines, the industry itself has been largely optimistic about the prospects of overseas sales.
On recent investor calls, Lockheed Martin executives said there’s been no reduction in demand from the Middle East. They touted F-16 fighter jet deals with Bahrain, Bulgaria, Slovakia and ― pending government approval ― Taiwan, as well as demand for Hellfire missiles and the Guided Multiple Launch Rocket System, the Joint Air-to-Surface Standoff Missile and the Patriot Advanced Capability-3 missile.
Lockheed Chief Financial Officer Kenneth Possenriede, on an investor call earlier this month, pointed to demand for the F-35 jet from Poland, Belgium and Japan, and Lockheed’s plans to participate in aircraft competitions in Switzerland, Spain and Finland.
“We’re in the final stages of the Canada competition, which we feel pretty good about,” he said.
In Raytheon’s May 7 earnings call, CEO Greg Hayes acknowledged Saudi Arabia is challenged by the lower oil prices, but added: “I don’t think peace is breaking out anytime soon in the Middle East.” The company anticipated Riyadh will buy its AN/TPY-2 Surveillance Transportable Radar, which is linked to the Terminal High Altitude Area Defense missile defense system.
“So far, we have continued to see good cash come in from the Middle Eastern customers during the first quarter, surprisingly even with oil out there,” Hayes said. “They need the equipment, they want the equipment and we need to help them defend themselves.”