WASHINGTON ― President Joe Biden’s foreign aid request for Ukraine, Israel and the Indo-Pacific remains stalled on Capitol Hill, inhibiting funding for a unique mechanism that could help U.S. allies and partners build up their own defense industries.
Until recently, Israel was the only country with a special privilege called offshore procurement, which has allowed it to use a portion of its Foreign Military Financing, or FMF, grants to invest in its own defense-industrial base instead of purchasing weapons from U.S. defense contractors as other recipients are required to do.
Congress approved offshore procurement for Taiwan FMF more than a year ago, hoping to replicate the Israel model and help Taipei grow its on-island production lines as it seeks to deter a possible Chinese invasion. The roughly $110 billion foreign aid bill stalled in Congress would allow Israel and Taiwan to use Foreign Military Financing for offshore procurement, but it does not extend those privileges to Ukraine or eastern European allies impacted by the war.
“We need to build production capacity there; we need to build it here,” said Brad Bowman, the senior director of the Center on Military and Political Power at the hawkish Foundation for Defense of Democracies, noting offshore procurement can help friendly countries make their defense industries more self-sufficient.
“With applications to Ukraine, Israel and Taiwan, we want to make the defense-industrial base in each of those three beleaguered democracies as healthy and robust as possible in order to meet their respective military requirements while first prioritizing the U.S. defense-industrial base,” said Bowman. “But the second brush needs to be that we are doing everything we can in our defense-industrial base to create additional defense-industrial capacity to help our beleaguered democratic partners because this is a wise investment and not charity.”
Taiwan
When Congress approved up to $2 billion per year in FMF for Taiwan in the fiscal 2023 National Defense Authorization Act, it made 15% of that amount eligible for offshore procurement.
“The comparison to Israel was brought up in the policy discussions saying, ‘Look, we’ve had success with using our FMF for Israel’s domestic defense industry, we should do the same for Taiwan. We made the argument it’s even more relevant because of this need for on-island protection,” said Josh Paul, the former congressional affairs director at the State Department’s Bureau of Political-Military Affairs.
“That’s something the administration supported with the theory being that we want Taiwan to build its on-island capacity to produce munitions because in some Taiwan contingencies, you can imagine a scenario where it’s hard to get stuff to the island,” Paul told Defense News.
Most FMF grants and loans allow the recipient countries to buy weapons from U.S. defense companies via the Foreign Military Sales process. Allowing Taiwan to use FMF money on its own defense industry could help relieve the roughly $19 billion Foreign Military Sale backlog partially caused by U.S. defense-industrial base constraints.
Eric Gomez, a senior fellow at the libertarian Cato Institute, said offshore procurement is “a good idea for trying to get countries like Taiwan to develop their defense industry on their own.” Still, he pointed to discussions on Capitol Hill and the State Department about whether FMF is “appropriate” for Taipei given the island’s estimated $800 billion GDP for 2023.
Concerned about placing additional strain on the State Department’s base budget, congressional appropriators opted to fund Taiwan FMF as loans instead of grants for FY23. The State Department obligated $80 million in Taiwan FMF in August. If Congress passes the foreign aid bill, much of the $2 billion in Indo-Pacific FMF is expected to go toward Taiwan.
Israel
Roughly half of the State Department’s annual FMF budget, or $3.3 billion, goes to Israel each year. Israel had historically been allowed to use a quarter of its FMF for offshore procurement on its own defense contractors instead of U.S. companies, which FMF recipients are generally required to buy from.
The $38 billion, 10-year memorandum of understanding with Israel signed under the Obama administration gradually phases out its offshore procurement privileges through 2028. The offshore procurement privileges for Israel’s annual $3.3 billion in FMF is slated to drop from more than 20% in FY24 to less than 15% in FY23, according to the Congressional Research Service.
However, the Senate’s foreign aid bill allows Israel to spend 100% of its extra $3.8 billion in FMF on its own defense contractors instead of U.S. companies, while taking the unusual step of waiving the standard congressional notification requirements. Paul noted this push came from the White House’s Office of Management and Budget, or OMB, after Hamas’ Oct. 7 attack on Israel.
“This was a point at which we were putting together a rushed supplemental,” said Paul. “The push from OMB was not only use all the available authorities, but we need to come up with any new authorities as well just to show that we can do everything in our power to be supportive of Israel.”
Paul, who resigned to protest the civilian death toll in Gaza in October as the Biden administration assembled the supplemental, noted offshore procurement in Israel has helped it build an industrial base that sometimes competes with U.S. defense contractors.
“This has been a very major subsidy for major companies like Rafael, Elbit or IAI as they sort of invest in themselves to grow their own capabilities to the point where they’re now a top 10 global defense exporter, particularly in fields such as unmanned aerials systems, including one-way UAS and a lot of other electronic military intelligence systems,” said Paul.
Still, Bowman said “there’s no scenario where I think Israel will become independent in its defense-industrial base.”
Bowman argued Israel “should focus” on developing “the systems they would have problems getting in a future war with Hezbollah in Lebanon.” He noted this would reduce Israel’s dependence on Washington since some Democrats have called for conditioning its military aid amid human rights concerns.
Ukraine and Europe
There is no authorization to use offshore procurement for Ukraine FMF, but Biden’s foreign aid spending request asks for it. The current bill includes $1.7 billion in FMF for Ukraine and countries impacted by the war.
The majority of FMF appropriated in previous Ukraine aid packages has gone to European countries impacted by the war rather than Kyiv, which has received the bulk of its U.S. support from direct weapons transfers from U.S. stockpiles and longer-term assistance via the Ukraine Security Assistance Initiative.
Gomez said there’s less need to give NATO members offshore procurement because they already have appropriate defense-industrial capacity. “It’s just that they don’t spend enough money on it.”
Biden and Senate Minority Leader Mitch McConnell, R-Ky., have touted the fact that most military assistance in the foreign aid supplemental goes to U.S. defense contractors, arguing it spurs job creation.
In Ukraine, the Biden administration has sought to help Kyiv Ukraine build its defense systems in-country with the Commerce Department hosting a U.S.-Ukraine defense-industrial base conference in December. Lockheed Martin and Raytheon signed a memorandum of understanding in September to produce Javelin anti-tank missiles in Ukraine.
“Another big difference between Ukraine and Taiwan is the active conflict in Ukraine,” Gomez added, noting one of the problems for offshore procurement in Ukraine is the question of whether its “defense industry can be survivable enough to produce things.”
President Volodymyr Zelenskyy has warned Ukraine could lose the war if Congress does not pass the foreign aid spending bill, and it’s unclear how Congress and the State Department will pay for FMF for Taiwan without the supplemental.
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