WASHINGTON — The U.S. State Department is expected to take a significant cut in Foreign Military Financing under the Trump administration's fiscal 2018 budget request, but Congress has quietly introduced legislation that could slow a planned move to switch some funding to a loan program.

If congressional action does not reverse the current course, several countries with smaller defense budgets that traditionally rely on U.S. military aid to procure American-made defense equipment will see their funding diminished, if not cut outright. 

Foreign Military Financing has largely taken the role of a grant given to U.S. allies to allow them to buy defense equipment. With the exception of Israel, all countries that receive FMF have to spend it on goods made in the United States, a boost for the domestic defense industry. 

For full FY18 budget coverage, click here.

Of the $5.7 billion request for FMF for 2017, $3.1 billion was for Israel, $1.3 billion for Egypt and $350 million for Jordan, the three largest recipients. The amount of $950 million was divided up among various other nations, such as $150 million for Iraq, $12.7 million for Moldova and $45 million for Tunisia.

But under the Trump administration, which considers reshaping the way America handles foreign aid a priority, the current setup of FMF may be about to change. In the top-line budget guidance issued in March, the White House indicated it would seek to turn FMF into a "loan" program, without providing details. 

On Thursday night, the Third Way think tank released a spreadsheetthat claims to represent U.S. President Donald Trump's budget. Defense News could not independently confirm the authenticity of the numbers, but there are two FMF accounts totaling $5.1 billion. There are also two account lines zeroed out under the "Foreign Military Financing Loan Program Account."

While there are no other details in the spreadsheet, a source with knowledge of the budget discussions said a plan being circulated several weeks ago — one that was still in flux at that time and may be changed when the budget drops Tuesday — called for Israel, Egypt and Jordan’s FMF to remain unchanged, while Pakistan’s allocation will drop from around $265 million to $100 million. The remaining total would be reduced to about $200 million in FMF grants.

The proposed FMF cuts, part of a larger package of cuts to diplomacy and other non-defense items in the 2018 budget, are meant to fund an increase to the defense budget. In that context, the FMF proposal costs more than it delivers, said Anthony Cordesman, of the Center for Strategic and International Studies.

"When you look at the size of what you’re saving — I won’t say its chump change, but it has no real impact in paying for any real military capability," he said. "What [it] does is it puts more of a burden on countries who were given FMF because they didn’t have the resources to develop forces.

"You are crippling programs that help create strategic partners to save amounts of money that have almost no impact on the problems that face U.S. force capability, and it makes no sense whatsoever."

Brett Schaefer, a foreign policy expert with the conservative Heritage Foundation and whose 2016 paper is reportedly influencing budget plans, defended the expected cuts to State, saying the goal is to expand the defense budget without cutting the budget overall. The State Department and foreign aid budgets are likely targets because they saw significant growth under the Obama administration.

Schaefer advocates streamlining the bureaucracy surrounding foreign policy to make the State Department more central. Areas where the Obama administration emphasized its own priorities, like climate change, and its proliferation of czars, envoys and policy-focused bureaus are obvious targets for cutbacks, Schaefer said.

"Go back to 2005 and the size of the State Department staffing is about 5,000 less than in 2015," Schaefer said, adding that 2005 was the "height of our involvement in Iraq and Afghanistan, when we had enormous increases in aid and diplomacy."

Switch to loans

However, the situation is not cut and dry. To ameliorate the loss of funds, the Trump administration is considering offering FMF under a loan program, according to the source familiar with the budget discussions.

Under that regime, instead of the U.S. giving the funds to a partner nation with the obligation that they spend those funds on U.S. defense goods, the partner would have to return that money to Washington in the future.

The problem with the loan system, warn critics, is that nations would essentially be double-spending those funds. An FMF loan of $10 million would actually cost the country that accepts it $20 million, first for spending the money on U.S. materiel and then paying it back.

In an op-ed for the Forum on the Arms Trade, Rachel Stohl and Shannon Dick, a pair of analysts with the Stimson Center, warn that under such a regime, countries may be priced out of being able to accept the money, potentially causing them to turn to other, cheaper sources of equipment, including from key competitors.

"Should the administration follow through with converting grants to loans, it could harm U.S. industry and lead business into other markets that offer less expensive alternatives, such as those maintained by Russia and China," the two wrote. "Why would buyers pay for systems they used to get for free, and in fact pay more than if they were to seek military equipment from other suppliers?"

However, an FMF loan program is already on the books. In 2016, Iraq received $250 million as a loan to be repaid over an eight-year period. That funding has been used to help fund that nation’s procurement of munitions, maintenance for aircraft, an Air Force training academy and equipment for the Kurdish peshmerga, including a recently announced Foreign Military Sales case to arm two infantry brigades and two support artillery battalions for Iraqi Kurds.

Schaefer declined to comment on the FMF proposal directly but expressed confidence that Secretary of State Rex Tillerson will have a strong defense as to why the funding cuts are necessary.

But Congress may be skeptical, and some members are already making moves against a major shift in how the U.S. handles its foreign military aid.

As part of the 2017 omnibus spending bill passed by Congress earlier this month, the administration is required to provide to Capitol Hill this summer with an assessment of the budgetary and diplomatic impacts of transitioning FMF grants to loans. The assessment would have to include "the extent to which such transition would affect the foreign policy interest of the United States," particularly those included in the 2018 budget.

And in March, Sen. Lindsey Graham, R-S.C.,  and chairman of the Senate Appropriations Subcommittee on State, Foreign Operations, and Related Programs defended the loan program, noting: "Sometimes we have to subsidize the allies’ purchases, but they buy American equipment and they do pay. … You have to show me where a loan is better for our national security."

Aaron Mehta was deputy editor and senior Pentagon correspondent for Defense News, covering policy, strategy and acquisition at the highest levels of the Defense Department and its international partners.

Joe Gould was the senior Pentagon reporter for Defense News, covering the intersection of national security policy, politics and the defense industry. He had previously served as Congress reporter.

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