The Security Assistance for Taiwan Debate: FMF Loans versus Grants

The Security Assistance for Taiwan Debate: FMF Loans versus Grants

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The Security Assistance for Taiwan Debate: FMF Loans versus Grants

As tensions mount in the Taiwan Strait and concerns about a military conflict grow, the US Congress has been actively discussing and planning for new ways to facilitate the flow of military capabilities to Taiwan amid slowdowns caused by other processes and considerations. Even before Russia’s invasion of Ukraine, Senator Josh Hawley (R-MO) and Representative Mike Gallagher (R-WI) in 2021 introduced the Arm Taiwan Act of 2021, followed later that year by the Taiwan Deterrence Act, introduced by Senator James Risch (R-ID). These bills would each authorize the United States to offer Taiwan military assistance or foreign military financing (FMF) in order to expedite the means by which the island-democracy could acquire defense articles and services necessary to help it defend itself. These calls have occurred against a backdrop of rising concern among senior US military planners, who in recent years have begun sounding the alarm about the possibility that the People’s Liberation Army (PLA) could invade Taiwan as early as 2025 or 2027.

Eligibility for the FMF program is determined by the Department of State and executed by the Department of Defense. FMF determination enables recipient nations “to purchase US defense articles, services, and training through either foreign military sales (FMS) or, for a limited number of countries, through the foreign military financing of direct commercial contracts (FMF/DCC) program.” FMF may be provided to a partner nation on the basis of either a grant or direct loan. This unique program is currently offered to only a select few US security partners, including countries such as Israel, Jordan, and Egypt. 

The Debate Over Grants vs. Loans for Taiwan in the 2023 NDAA

At least initially, there was notable pushback against these proposals: primarily focused on Taiwan’s status as a relatively wealthy country not in need of financial assistance, as well as concerns that mandating the purchase of certain equipment would be too heavy-handed, and would infringe on Taipei’s sovereign decision-making to purchase the types of equipment that best meet its own objectives. However, the proposal was generally met with warm receptions from Taipei and its supporters for potentially opening new modes of defense and security cooperation between the United States and Taiwan. In analyzing the content of the two initial bills, GTI Senior Non-Resident Fellow Michael Mazza observed, “A key insight inherent in both bills is that the current American approach to assisting Taiwan in defending itself has proven insufficient. Arms sales remain a crucial and necessary component, but they have failed to provide Taiwan with the full spectrum of needed capabilities at a suitably rapid pace.”

The general language of the 2021 legislative proposals was eventually included in the 2023 National Defense Authorization Act (NDAA) that was passed by Congress and signed into law by President Joseph Biden in late 2022. Specifically, the 2023 NDAA stated that “there is authorized to be appropriated to the Department of State for Taiwan Foreign Military Finance grant assistance up to $2,000,000,000 for each of the fiscal years 2023 through 2027.” If included, the authorization would have made up a significant portion of the total USD $6.1 billion for FMF enacted in the 2023 budget.

Despite the authorization of FMF grants by the committees of jurisdiction, in the Consolidated Appropriations Act—which was passed into law after the authorization bill came into effect—appropriators in Congress only included the approval of loans, with no mention of the grants. The language of the relevant appropriations states “that the gross principal balance of such direct loans shall not exceed $2,000,000,000, and the gross principal balance of guaranteed loans shall not exceed $2,000,000,000.” The inconsistency of the authorization bill with the appropriation bill underscores a frequently misunderstood aspect of the US policy process: that the US Constitution mandates that “the power of the purse be exercised through the lawmaking process, allowing Congress to craft the terms of appropriations or deny appropriations outright through legislation.” In effect, this means that the critical decision of ultimate appropriation is determined by a relatively small committee of members.

This obvious but critical difference between a loan (which would have to be paid back) and a grant (which would not) is now the focus of heated policy debates. As noted earlier, while the NDAA 2023 included provisions for the authorization of up to USD $2 billion in FMF for Taiwan, it did not clarify whether this funding would be provided as a grant or loan. Consequently, the Consolidated Appropriations Act that was legislated at the end of 2022 only appropriated up to USD $2 billion in loans for Taiwan in 2023. Moreover, the interest on the authorized loans would make it more cost-effective for Taiwan to take out its own loans to purchase the equipment, if they wanted to purchase them at all.

The Debate Continues in 2023

This apparent disconnect in authorizations and appropriations prompted several senior Republican members of Congress to issue a letter to the Biden Administration in February 2023, calling on the executive branch to increase its budget request for FMF grants in the 2024 budget request. In the letter, the members noted: “The loans included in the most recent appropriations bill are potentially helpful, but without FMF grants, loans are not enough to address the scale of this challenge.” In calling on the executive branch to include funding for military assistance grants for Taiwan, the lawmakers concluded that: “This would signal to Congress and Taiwan that the administration in fact prioritizes resources for the policies it has publicly supported and signed into law.”

When asked about the implications of the appropriation of FMF loans rather than grants, Randy Schriver, chairman of the Project 2049 Institute and the former assistant secretary of defense for Indo-Pacific security affairs under the Trump Administration, noted:

[T]he fact of the matter is the FMF tool in the form of loans is not likely to be leveraged because our friends in Taiwan…are wealthy enough to invest through the FMS channel or direct commercial sale channel. […] [N]o matter what the particular vehicle for security assistance, I think the more fundamental question is coming to the meeting of the minds with Taiwan on what those priorities should be […] Our friends in Taiwan are dealing with coercion every day and are very much interested in being able to meet that coercion challenge with intercepts and presence […] if the Congress is able to say this [is] important enough—not only for Taiwan but more importantly to US security interests for Taiwan to have additional capabilities [that] we think it’s so important that we will be part of the funding ourselves then […] I’m for it.


After two years of intense debate following the initial introduction of the military assistance and FMF legislations, the policy arguments are no longer centered on whether Taiwan should be considered a FMF security partner. Instead, they are more specifically focused on how this growing and evolving defense partnership could be more optimally prioritized and structured. However, Congressional appropriators remain narrowly focused and skeptical of Taiwan’s need for grants from the United States. 

The clear upside to FMF grants for Taiwan is that it would give Washington more skin in the game in determining, in consultation with Taipei, the exact capabilities that are necessary for the island’s self-defense. It would also help to relieve domestic political pressure within Taiwan against raising its defense spending by pushing back against the misleading narratives and myths that are commonly associated with US arms sales. Finally, and perhaps most critically, it would immediately make available a sizeable increase in defense spending that could rapidly augment the type of defense capabilities that Taiwan needs to deter China. This is especially crucial now, as the intelligence community has assessed that Xi Jinping (習近平) has ordered the rapidly-modernizing PLA to have the capabilities to invade Taiwan by 2027. It is worth remembering that it took nine years for Ukraine to field the capabilities that it has now in defending against Russia’s invasion.

As Taiwan is unlikely to take the FMF loans due to the aforementioned reasons, this could potentially renew the lingering impression of some in the United States that Taiwan is not serious about its defense. However, this would be a flawed understanding of the budgetary processes of both sides. Additionally, it is worth noting that Taiwan already spends around 30 percent of its central government’s annual budget on defense-related expenses, and the budget for 2023 is also significantly higher than that of the previous year. 

As Taiwan readies for its national elections to be held in January 2024, Washington should also be mindful of how US arms sales to Taiwan could play out politically within Taiwan’s raucous political debate. Indeed, when the original bills proposing military assistance and FMF were introduced, Mazza observed that “opposition politicians in Taiwan have already raised concerns the bill will impinge on its sovereignty. Because both bills so openly treat Taiwan as a junior partner, they threaten to undercut the diplomacy that is desperately needed to ensure an effective combined defense.” 

In an increasingly tight budgetary environment for the United States—particularly after the Russian invasion of Ukraine—the debate over a distinction between urgency and imminency takes on a different meaning. To be clear, the fact that something may not be imminent does not make it any less urgent. Accordingly, policymakers interested in arming Taiwan will need to strike a fine balance as they negotiate budgetary issues. One workable solution under consideration may be to provide smaller FMF grants to Taiwan in stopgap measures, which could prioritize the capabilities that Taiwan needs right away. Whatever appropriators ultimately do, working through this process now would ensure that if the time comes when Congress would need to rapidly flow capabilities to Taiwan, it has the legislative procedures in place to do so. Neither party can afford to be penny wise and pound foolish, because the costs would undoubtedly be much higher later. 

The main point: While recent US Congressional bills have provided avenues to provide Taiwan with crucial FMF, disconnects between authorizations and appropriations—as well as a lack of understanding regarding budgetary processes on the Taiwan side—have weakened the policy. In order to ensure that Taiwan is not caught unprepared for a Chinese invasion, US policymakers should work to streamline and clarify the process for providing FMF grants to Taiwan.

(The author would like to thank GTI Intern Melynn Oliver for her research assistance.)