For the U.S. defense industry, Foreign Military Sales (FMS) and Direct Commercial Sales (DCS) are critical for sustaining growth, strengthening allied capabilities, and offsetting domestic budget constraints. However, when the U.S. Government (USG) shuts down, these efforts can come to a standstill, creating delays, financial uncertainty, and operational disruptions that ripple across the defense sector.
While government shutdowns are temporary, their effects on the State Department, Department of Defense (DoD), and interagency approval processes often outlast the shutdown itself. Licensing backlogs, security cooperation delays, and funding disruptions can impact international sales cycles, production schedules, and strategic partnerships for months after operations resume.
For defense companies, the key to mitigating these risks lies in proactive investment in compliance initiatives, designing for exportability, and strengthening global engagement. By taking preemptive steps during a shutdown, companies can maintain momentum and position themselves for long-term success once normal operations resume.
The Impact of a U.S. Government Shutdown on FMS & DCS
Delays in Licensing and Approvals
A government shutdown disrupts the export control system, creating bottlenecks in licensing approvals for both FMS and DCS transactions. The State Department’s Directorate of Defense Trade Controls (DDTC), responsible for ITAR licenses, may face delays in processing new licenses and adjudicating pending requests. While many DDTC personnel are funded through registration fees, they rely on Operations & Maintenance (O&M)-funded personnel within the Military Departments (MILDEPs), as well as Technology Security & Foreign Disclosure (TSFD) staff in the interagency (e.g., the Defense Technology Security Administration (DTSA)). If those personnel are furloughed, export license processing could slow significantly, creating a backlog that persists long after the shutdown ends. The Bureau of Industry and Security (BIS), which manages EAR-controlled exports, may also experience slower processing of Commodity Classification (CCATS) and export licenses. This compounds existing challenges, as the current administration has already imposed additional BIS licensing holds for critical technologies and sensitive destinations. A shutdown further complicates export timelines for defense companies relying on commercial sales pathways.
Disruptions to Security Cooperation Programs
The Defense Security Cooperation Agency (DSCA), which oversees FMS cases, may experience delays in processing Letters of Offer and Acceptance (LOAs), contract awards, amendments, and funding allocations. While many DSCA personnel are funded through FMS administration fees, the agency still relies on O&M-funded positions within the Military Departments (MILDEPs) and interagency TSFD offices. If those personnel are furloughed, FMS case execution slows down, and backlogs grow. A shutdown may also disrupt U.S. defense attaché and security cooperation personnel engagement, impacting U.S. government advocacy for industry-led sales efforts. Training programs and equipment deliveries funded through U.S. security assistance accounts (e.g., Foreign Military Financing (FMF), Building Partner Capacity programs) could face delays, further weakening international trust in U.S. defense support.
Contracting & Payment Uncertainty
Delayed or frozen DoD contract payments can place short-term financial strain on small and mid-sized defense firms. Companies that rely on government-funded export support mechanisms—such as the Export-Import (EXIM) Bank, DoD advocacy programs, or U.S. Trade and Development Agency (USTDA) feasibility studies—may find their deals stalled, putting international opportunities at risk.
Turning Disruption into Opportunity: Invest in Compliance & Exportability
Instead of waiting for government operations to resume, defense companies should take advantage of the downtime to strengthen their export strategy, mitigate risks, and position themselves for long-term success.
Strengthen Global Trade Compliance
A shutdown is an ideal time to audit, refine, and enhance compliance programs to ensure readiness when licensing processes resume. First, conduct an internal ITAR/EAR compliance audit to identify and correct gaps. Second, review and update Technology Control Plans (TCPs) to safeguard export-controlled data and reduce compliance risks. Third, implement automated compliance tools for Restricted Party Screening, license tracking, and recordkeeping, reducing manual workloads. Fourth, prepare for post-shutdown licensing surges by pre-drafting license applications and gathering required documentation in advance.
Design for Exportability
Companies should evaluate whether export control restrictions limit the exportability and releasability of their products—and, if so, determine whether design modifications could broaden international sales potential. First, assess how export policies impact the releasability of your technology and adjust accordingly. Second, leverage AUKUS and ITAR reform initiatives to identify new licensing exemptions and technology-sharing pathways with key allies. Third, explore ITAR and EAR exemptions/exceptions that may allow for faster foreign sales without requiring full licensing approval.
Build Relationships with Key Stakeholders
While U.S. government operations may be paused, international customers, partners, and stakeholders remain active. This is an opportunity to strengthen global relationships and prepare for future engagements. First, engage directly with foreign customers, defense attachés, and industry partners to align on future sales and program requirements. Second, prepare for post-shutdown advocacy efforts by mapping out engagement strategies for DSCA, DTSA, DDTC, MILDEPs, and key decision-makers once operations resume.
Diversify Global Sales Strategies
A shutdown highlights the risks of relying solely on U.S. government contracting and FMS pathways. Companies should diversify their global sales approaches to maintain business momentum. First, explore alternative export pathways, such as third-party transfers (TPTs), offsets, and international co-development agreements to keep international sales moving. Second, consider commercial export opportunities under EAR jurisdiction, which may not require ITAR licenses and interagency reviews and can offer greater flexibility through EAR exceptions.
Conclusion: Stay Agile, Stay Prepared
A U.S. government shutdown is an unavoidable challenge, but it doesn’t have to stall your FMS and DCS business. By investing in compliance, designing for exportability, and strengthening global relationships, defense companies can turn uncertainty into strategic advantage.
At DTS, we help companies navigate complex export regulations, accelerate global defense sales, and develop resilient strategies to overcome government roadblocks. If you’re looking to position your company for long-term international success, let’s talk.
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