Takeaways from Dip in U.S. Foreign Military Sales.

• Author: Lee, Nooree
• Position: Government Contracting Insights

* In December, the Defense Security Cooperation Agency announced the fiscal year 2021 transaction figures for the U.S. Foreign Military Sales program. Several trends revealed in the data could have major implications for contractors moving forward.

The agency reported $34.8 billion in total FMS transaction value for 2021, down 31 percent from fiscal year 2020 when the total reached $50.8 billion. The 2021 figure marks a decline for the second consecutive year and represents the lowest volume of foreign military sales transactions since 2016.

As recendy as 2019, FMS totaled $55.4 billion, with a $51 billion average transaction value from 2017-2019. Transactions slipped slightly in 2020 to $50.8 billion but then cratered this past year. Because sales figures fluctuate annually due to a few high-value transactions, DSCA includes three-year rolling averages in its annual reports rather than only single year fluctuations. For example, FMS declined 28 percent in 2016 before recouping most of those losses the next year. Therefore, the significant decline in 2021 may be an anomaly.

Even though foreign military sales numbers may recover quickly, there are several notable takeaways.

First, the steep decline in FMS last year may not signal a decrease in America's commitment to its global allies. Indeed, even though foreign military sales dropped 31 percent, the United States increased funding to the Foreign Military Financing program from $3.3 billion to $3.8 billion. In addition, U.S. contributions to the Building Partner Capacity programs remained relatively steady, declining slightly from $2.69 billion to $2.34 billion.

The decrease in overall FMS figures was driven by a 36 percent fall in foreign government-funded transactions.

Second, direct commercial sales, or DCS, arrangements between U.S. defense contractors and foreign governments dropped 16.8 percent in 2021, from $124.3 billion in 2020 to $103.4 billion. Foreign military sales involve the U.S. government directly procuring defense materiel or services before transferring them to a foreign defense ministry. In contrast, direct commercial sales do not involve the U.S. government as a contractual party.

The federal government oversees direct commercial sales, which are governed by U.S. export controls laws. But, compared to its direct involvement in FMS, the U.S. government's oversight of direct commercial sales is primarily indirect. Therefore, the decline in DCS may indicate that the...