Foreign arms sales are an extremely lucrative part of defense contractors' business. In fact, the U.S. defense and aerospace industrial base brings in $20 billion annually in foreign exports. But that figure is tempered by export controls dating to the Cold War era. Consequently, top defense contractors such as Lockheed Martin (NYSE: LMT ) , Boeing (NYSE: BA ) , and Northrop Grumman, have all supported export reform. And now, they're getting it. But this new change could also cause significant problems.
Obama cuts the red tape
On Oct. 15, the State Department, in collaboration with the efforts of the President's Export Control Reform initiative, moved a number of items from the highly regulated U.S Munitions List, or USML, to the less regulated Commerce Control List, or CCL. In laymen's terms, this means the bureaucratic red tape just got reduced, and items such as aircraft, parts for military aircraft, and gas turbine engines can now be sold to foreign nations in a more streamlined manner.
Further, items such as military helicopters and transport planes are now under control of the Commerce Department and are eligible for license-free export as long as the sale is to one of the United States' 36 allied governments. That's great news for Boeing's Chinook and Blackhawk, Lockheed's C-130 transport planes, and Textron's (NYSE: TXT ) Kiowa Warrior Helicopters.
Moreover, the shift in items from the USML to the CCL has just begun. Starting in January, the control over some ground vehicles and vessels of war will move from the State Department to the Commerce Department. In fact, every USML category is being reviewed, and if an item is deemed "less sensitive" it'll be moved to the CCL.
What this means for defense contractors
Export control reform is something defense contractors have been pushing for some time, and for a very understandable reason. Currently, foreign sales have to be thoroughly vetted by the State Department -- a process that not only carries weighty fees but is also time-consuming, which can create problems with a sale.
Conversely, sales through the Commerce Department aren't subject to the same fees and can be processed faster thanks to less rigorous scrutiny. This gives U.S. defense contractors more of an edge in foreign arms deals.
Good for defense, but not for others
The easement of foreign arms sales regulations is welcome news for defense contractors, but it also carries with it a number of concerns. Most notably, the Government Accountability Office said the revised laws could allow defense weapons to more easily fall into the hands of human rights abusers, terrorists, and countries seeking to develop nuclear weapons, and the Center for International Policy said the reform could "reduce U.S. employment" by allowing previously USML-controlled items to be assembled overseas. Further, it stated: "The administration's claims of major economic benefits from export control reform have not been substantiated. In fact, there is strong evidence to suggest that export reform is unlikely to significantly increase U.S. sales of military-related technology."
Regardless of who wins and who loses, export control reform is in full swing, and items previously controlled by the USML are now moving to the CCL. While it's probable that this move will cause issues, it's also a huge win for defense contractors looking to take advantage of overseas sales. Consequently, if you're interested in defense stocks, this is good news for you, too.
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