Why the U.S. won’t cut military aid to Egypt

The recent crackdown on foreign-funded non-governmental organizations (NGOs) in Egypt has sparked a new round of diplomatic hand wringing over Washington’s long-standing military aid program. Despite tepid threats from the White House and Congress, the United States is unlikely to end official military assistance — not because of concerns over Egypt’s peace treaty with Israel or Washington’s desire to maintain influence over Cairo — but because the aid benefits a small and influential coterie of elites in both capitals. In the United States, the aid program provides a large and predictable source of demand for weapons exporters, while in Cairo, collaborative military production with U.S. firms help subsidize the army’s commercial economic ventures.

Although domestic interest groups are rarely invoked in the debate over military aid to Egypt, the $1.3 billion in annual assistance represents a significant subsidy to U.S. weapons manufacturers. For instance, the General Dynamics manufacturing facility in Lima, Ohio where the M1A1 Abrams tank is built will not have more work orders from the U.S. Army until 2017 when the current M1 tank fleet is up for refurbishing. Egypt’s latest $1.3 billion order of 125 M1A1s (Cairo’s 11th order since the late 1980s) will keep those production lines open until 2014 building knock down kits that are then shipped and assembled in Egypt. Although shipping fully assembled tanks to Egypt would employ more U.S. workers, without the contract the Lima plant (in a crucial electoral swing state) would shutter its doors and General Dynamics’s bottom line would take a serious hit. Looming reductions in the U.S. defense budget have made General Dynamics and other defense producers even more concerned with keeping such funding channels open.

Egypt’s current Minister of Military Production Ali Sabri now boasts that over 95 percent of the M1A1 assembly takes place in Egypt’s military factories. While it’s true that most of the actual assembly takes place in Cairo (rather than Lima, Ohio), in the contemporary era of outsourcing the precise location of production is relatively unimportant from the defense firms’ perspective. The increasing indigenization of production in Egypt may imply the loss of U.S. jobs — but it is shareholder value (not work-hours for blue collar Americans) that dictates General Dynamics’s corporate planning. Transferring more work to Cairo likewise ensures that the Egyptian Army remains heavily invested in the project and continues to dedicate its aid dollars to procuring more tank kits. In fact, weapons manufacturers prefer contracts with such outsourcing components because they increase the per-unit price of equipment, and therefore also the firms’ revenue.

General Dynamics is only one of several tier-1 contractors that will get a boost from the recent M1A1 sale to Egypt; others include Honeywell (of Arizona) and Allison Transmission (of Indiana). A cable from the U.S. embassy in Cairo released by Wikileaks demonstrates the interest that the U.S. Government has in using aid to Egypt to promote the interests of domestic weapons producers. In the cable, U.S. military planners are said to be "especially concerned" that without the tank sale to Egypt, Allison may not be able to "maintain its transmission line’s profitability." But since openly linking defense policy-formation with concern over corporate profits is a rather vulgar endeavor, the cable also lists a host of (rather dubious) geostrategic rationales to support the aid-financed tank transfer. Stated concerns include Egypt’s ability to deter aggressive neighbors, but Egypt already possesses more tanks than all of Latin America and sub-Saharan Africa combined — and one of the largest fleets of M1 tanks in the world. Considering that Egypt’s own military officers admitted to U.S. Government officials that they did not regard Israel as a military threat, and that military delegations are currently visiting Libya to examine potential "reconstruction" contracts with the new government in Tripoli — it is unclear just where these "aggressive neighbors" might be lurking.

The embassy cable also cites "continued employment" and "technical training" for the Egyptian workers involved in M1A1 assembly, which the authors characterize as "important, given Egypt’s estimated unemployment rate of 15-25 percent." Although the Egyptian military claims to employ about 40,000 individuals throughout its network of factories, other sources offer figures more than double that number. The Arab Organization for Industrialization (AOI), one of the military’s industrial conglomerates, claims to employ 17,000 Egyptians — a figure that excludes the dozen or so factories operating under the Ministry of Military Production as well as the massive chemical, agricultural, and consumer service operations of the National Service Projects Organization (also under military control). The figure provided by the U.S. Government for employment on the M1A1 program is 2,200 (the K-8 jet trainer co-production program with China reportedly employed roughly 1,000 Egyptian soldiers). If these two relatively large-scale collaborations only employ 3,200 Egyptians they are not much of a national works program. The resources used to produce these weapons systems in-country would produce a much larger number of jobs if used to stimulate civilian manufacturing.

But military co-production projects like the M1A1 and the K-8 provide more than just jobs and fancy hardware to Egypt’s Armed Forces. Defense procurement has played a pivotal role in growing the Egyptian military’s commercial enterprises — notably in civilian automobile manufacturing — which offers an instructive case for understanding the value that the Supreme Council of the Armed Forces (SCAF) places on continued U.S. aid. The U.S. firm, Chrysler, which was the original producer of the M1 tank before the division was sold to General Dynamics in 1982, owns a 49 percent stake in the Arab American Vehicles Company (AAV), where the Egyptian military not only produces armored versions of Jeep vehicles, but also civilian versions for commercial sale, including the Jeep Liberty and the Jeep Wrangler. The AAV factory produced an average of 2,700 vehicles per year between 1979 and 2009, but has since spent $27 million to upgrade its assembly lines, and claims to currently produce vehicles at a rate of 17,500 per year. If we compare this to national figures provided by the Egyptian Automobile Association, then AAV produces nearly one-quarter of Egypt’s locally assembled passenger cars. In 2010 AAV signed a new contract with Chrysler (using U.S. military aid) for $33 million worth of additional unassembled jeeps, tools, and spare parts. The firm’s facilities, equipment, and trained engineers — funded by previous military procurement contracts — also make AAV an attractive partner for other global car companies hoping to break into the Egyptian market. AAV currently produces vehicles under license from Peugeot, KIA, Citroen, Hyundai, and the Chinese manufacturer Zhongxing (ZX Auto). (Pickup trucks and SUVs produced by ZX Auto were also a common scene during the recent uprisings in Libya — although it’s unclear whether any of these were manufactured by AAV). All these collaborations began (or were extended) in the 2000s.

The M1A1 tank facility provides another example. Here — in the same factory built by General Dynamics — the Egyptian military builds commercial construction vehicles that are sold on the domestic market. The Egyptian military reaps substantial profits from the commercial spin-offs of these joint ventures. Like the military’s other manufacturing operations, the revenue from these sales go directly into the Armed Forces’ coffers — since the institution is exempt from taxation. Add cheap labor (often provided by conscripts in their final six months of service) and other hefty state subsidies (such as reduced prices for energy inputs) and these commercial ventures form an important part of the military’s economic empire.

If the U.S. aid spigot is shut off, many of the firms that transfer technology to Egypt’s military producers (like Chrysler) might cease to do so. An end to aid could jeopardize the possibility of follow-on contracts, which ensure that the technologies and facilities provided by these firms are used to assemble and modify their own products. Indeed, the assembly of military-grade Jeeps in Egyptian factories has revived the brand’s military division, which had been displaced by the widespread adoption of the Humvee built by AM General. Since the first co-produced Jeeps rolled off AAV assembly lines they have popped up in factories in Israel as well, and a limited number are available in the United States through a firm called American Expedition Vehicles. Slashing assistance also has the potential to make Egypt’s generals more frugal, and therefore less willing to pay higher prices for collaborative production (or for the relatively higher priced U.S. material).

Of course, the United States is not the only state whose domestic firms supply equipment and resources to Egyptian military factories. In 2000, Egypt began work on assembling Chinese-designed K-8 jet fighters, a collaboration that included a second phase of jet assembly in 2005 and the establishment of an aviation research facility in Cairo. (Ironically, the K-8s assembled in Egypt are outfitted with engines from Honeywell — the same firm that supplies parts for the U.S.-designed M1A1 tank). At a 2010 ceremony, the AOI chairman announced that a new cooperative agreement between the two countries would soon yield joint production in new combat items (perhaps the local assembly of the JF-17, a jet of joint Chinese-Pakistani design). These collaborations in weapons production have seen parallel partnerships in the Egyptian military’s commercial factories, including Factory 360 — the Helwan Metallic Appliances Company — which has a brand new production facility churning out air conditioning units produced under license from the Chinese state-owned company Hisense. Chinese oil interests have also launched at least two joint ventures with Tharwa Petroleum — a public sector company in which the Ministry of Military Production has a minority shareholding.

Chinese investment is obviously of increasing importance to the Egyptian military’s balance sheet — but this too could be jeopardized by a cut in U.S. aid. Egyptian Military factories have periodically been reprimanded for violations of International Traffic in Arms Regulations (ITAR) rules — including more than once for allowing Chinese officials to tour Egyptian facilities where U.S. weapons are assembled. China’s defense manufacturers are famous (or infamous) for "stealing" foreign technologies in order to manufacture cheaper variants of popular weapons systems. If joint manufacturing programs like the M1A1 were scrapped because of a reduction in aid, the Chinese might not be so eager to continue on their current cooperative trajectory. Astonishingly, the U.S. embassy cable referenced above also highlighted the burgeoning China-Egypt defense partnership as a geostrategic dilemma that could be ameliorated by another tranche of aid-financed tank assembly…even though joint Chinese-Egyptian production of K-8 jets began when M1A1 assembly was already in its 12^th year.

It is these banal economic details that will provide the major plot lines for the dramatic public showdown over U.S. military aid to Egypt. To be sure, the high politics do matter: Israel does worry about the future of its peace treaty with Cairo, and the battle over U.S. NGOs could spin out of control, complicating relations between Washington and an influential regional partner. But so long as powerful interests derive substantial benefit from the continuation of the aid program — and as long as their lobbyists on Capitol Hill couch the money transfer in terms of creating jobs and supporting regional allies — the flow of dollars and weapons is unlikely to end. 

Shana Marshall is a research fellow at the Crown Center for Middle East Studies at Brandeis University.