How the U.S. benefits from providing military aid to other countries
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How the U.S. benefits from providing military aid to other countries
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Reader David Friedli from Murray, Nebraska, asks:
Regarding U.S. military aid to countries, is this a gift or a loan? If it is a loan, at what interest rate? And is there a standard repayment period? Of course, how much of that debt is defaulted on?
They say you shouldn’t loan money to friends if you expect to get it back. The U.S. learned that the hard way.
Juggling your personal finances isn’t the same as overseeing an entire nation’s budget. But borrowers have historically struggled to repay American military aid, which is why the U.S. now primarily hands out grants. Just $9 billion out of the $183 billion in aid that the U.S. has approved for Ukraine since 2022 is in the form of a loan, and the terms of that loan are generous.
The U.S. isn’t providing these grants out of benevolence. America loosens its purse strings to advance its geopolitical and economic interests.
“[Grants] provide more immediate support and don’t burden recipient countries with debt,” said David Kinsella, a professor of political science at Portland State University. “This approach can be more effective in achieving U.S. foreign policy goals, especially in crisis situations or when supporting less economically stable allies.”
The U.S. also gets an economic return on its investment. “A significant portion of military aid is spent on U.S.-made equipment and supports American defense industries,” Kinsella said.
If countries have to repay a loan, the terms are often unspecified and can be negotiated after the war ends, said Rosella Cappella Zielinski, an associate professor of political science at Boston University.
Countries that provide aid are trying to help out their allies immediately, and want to deal with any terms after the fact, Cappella Zielinski explained.
If a country does have to repay the U.S., the interest rates on those loans are generally below market rates, she said.
As countries struggled to repay debt, U.S. military aid shifted from market-rate loans to “outright grants” or these below-market rate loans, according to a 1985 report from the General Accounting Office, which is now known as the Government Accountability Office.
Between 1962 and 1988, loans made up 32% of all military and economic assistance. By 2001, loans represented just 1% of aid, according to a Congressional Research Service report.
In cases where the U.S. has loaned money, it’s taken other countries decades to pay it back. Britain, for example, finished paying off a $4.3 billion loan from World War II in 2006. That came with a 2% interest rate. And in the 1930s, Britain defaulted on U.S. debt accrued during World War I, which meant London lost access to U.S. securities and money markets.
When it comes to Ukraine, the U.S. can easily waive its $9 billion loan to the country, said Mark Cancian, a senior adviser at the Center for Strategic and International Studies. President Joe Biden is planning to cancel about half of that loan before President-elect Donald Trump takes office, Bloomberg News reported.
Republican lawmakers like Sen. Rand Paul of Kentucky are trying to block Biden’s plans, but the Democrat-controlled Senate would have to approve. The president has the power to cancel the remaining half after Jan. 1, 2026.
Lending a lot of money to another country means you are now “financially tied to the success of that state to avoid national collapse,” Cappella Zielinski said.
That may not be in the best interest of either party. “There is an old adage: ‘Owe the bank $5,000, the bank owns you. Owe the bank $5 million, you own the bank,’” Cappella Zielinski said.
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