Is There Anything Congress Will Not Sell?

U.S. Defense Industry Succumbs to Outsourcing National Security
William R. Hawkins
Wednesday, December 27, 2006

As the U.S. trade deficit continues to worsen, Americans are told by pundits and officials that they must accept losses in a number of manufacturing categories, from electronics to automobiles. They are told instead to concentrate their efforts in areas of comparative strength. Yet, when the United States has a clearly demonstrated competitive advantage in a major sector, foreign firms and governments target these areas to prevent the American economy from fully realizing the gains from its investment and innovation.

An example of this tactic was presented on December 6 when the Hudson Institute hosted a day-long conference on the "global character of the new defense industry." The think tank was up front about who was paying for this particular take on national security. The invitation stated that the event was "sponsored by the global aerospace and defense company Finmeccanica." Yet, this was still a bit misleading. While Finmeccanica seeks to operate on a global scale, it is very much a nationalistic Italian firm. A keynote speech was made by Pier Francesco Guarguaglini, Chairman and CEO of Finmeccanica. Additional speeches were given by Giovanni Castellaneta, Italy's Ambassador to the United States and Lt. Gen. Carmine Pollice, Vice Director of National Armaments for the Italian Ministry of Defense. And the identified target of the program was "legislation (‘Buy American' Acts) that limit Pentagon purchases of military equipment from non-U.S. manufacturers, particularly restrictions on military procurement from companies based in allied countries."

That an American think tank, especially one with Hudson's long pedigree on defense issues going back to its founder, renowned nuclear strategist Herman Kahn, would sell itself as a platform for a foreign corporation to attack aspects of U.S. policy is disturbing. Unfortunately, there were also plenty of Americans present to support "free trade " in defense systems. To a large extent, the six big American prime defense contractors have become assemblers ("system integrators") of components outsourced around the world. Their focus is on corporate planning, not on national requirements. It should never be forgotten – as it conveniently was at this conference, that the only reason the defense industry exists is to serve national requirements. The tone of the conference was that national policy should change to serve corporate interests.

Lockheed Martin apparently used its budding relationship with Hudson to open the door for Finmeccania's program. Lockheed Martin supplies avionics and propulsion gear to the Italian C-27J tactical cargo plane, whose manufacturer is vying for a 145-aircraft order to equip the U.S. Air Force and Army. Its main rival is the C-295 built by a French-German-Spanish alliance led by EADS. However, according to Defense News (Dec. 5, 2005), Lockheed Martin first became involved in the C-27J project as a defense “offset ” for its sale of C-130J aircraft to Italy.

The U.S. Interagency Offsets Steering Committee has defined offsets as "industrial compensation practices required as a condition of purchasing defense articles and services." Such offsets include mandatory co-production, licensed production, subcontractor production, technology transfer, counter trade, and foreign investment. The object is for the buyer to recoup as much as possible from the seller. According to the Commerce Department's Bureau of Industry and Security, which publishes an annual report on offsets, Italy received offsets equal to 93.8% of its purchases of U.S. military equipment over the period 1993-2004. The Italian government and its defense firms clearly do not follow the same "open" trading philosophy they want the United States to adopt. In 2005, Italy ran a $19.5 billion trade surplus with the United States, up from $17.4 billion in 2004. Italy is clearly not a victim of U.S. trade policy.

The most egregious example of an American firm giving cover to the foreign penetration of the U.S. defense industry is Northrup Grumman's role in promoting EADS against Boeing for the next generation of USAF refueling tankers. Northrup Grumman has been running ads in industry journals, but their early version gave the game away. A February ad opened with the claim that "for nearly a century Northrup Grumman has been creating and leveraging innovative technologies" but was now promoting "a cost-effective system based on EADS' commercially successful A330." The A330 is one of the Airbus models. The ads being run today have dropped any mention of EADS, though they continue to show the same artist conception of the A330 painted in USAF colors. It has become a true/false flag campaign. The Hudson conference morning session was on "obstacles to cooperation between allies on the research and development of new weapons and systems" though this quickly moved from R&D to the actual movement of production overseas. The afternoon session was focused on technology transfers and export controls, with an emphasis on needed "reforms" that would make it easier for foreign firms to get their hands on American technology.

There was very little real discussion, as Hudson earned its pay by stacking all the panels with globalists endorsing Finmeccanica's agenda. Still, occasionally something slipped out to warm the heart of an economic nationalist. Lisa Bronson, a professor at the National Defense University, argued that Defense Department acquisition culture is "not designed to share." It seeks the best weapon systems to meet American needs, and worries about "sharing" with allies only as an after thought. And this is a problem for whom? She also noted that European firms and governments were often more interested in gaining technology and a share of the production work, than in the performance of the military system in terms of mutual security.

One of the best speakers was not an American, but Gerald Howarth, a Member of Parliament who is also in the Conservative Party's shadow cabinet. As a Tory, he upheld that control of one's own defense industry and technical capabilities was a core attribute of sovereignty. He also acknowledged that with the UK spending only 2.3% of GDP on defense, and most of continental Europe spending not much more than 1% (compared to 4.5% of GDP in the United States), it was going to be difficult to maintain a European defense industry. Thus, European firms are looking to America to keep themselves in business.

Howarth noted that British Aerospace (BAE) already employs more people in the United States (38,000) than in the UK (32,000), and is the Pentagon's 6th largest supplier– but without acknowledging that it is "buy America" policies and preferences that have forced BAE to move facilities to the United States.

Policies that bolster such "in sourcing" by foreign firms should be strengthened, as they bring new capital and technology into the American economy, as opposed to "out sourcing" industrial capacity and future advances by importing goods from overseas. Many speakers noted that America does not have a monopoly on new ideas, but the aim of policy should be to capture ideas and add them to the U.S. industrial base.

Howarth argued that even though the UK cannot afford to maintain a full spectrum defense industry, it cannot just buy American weapons off the shelf because as a matter of sovereignty, it must keep certain critical industries protected at home. It must also gain full "sovereign" control over foreign technology embedded in the weapons it buys, as in the contentious case of the F-35 Joint Strike Fighter being sold by Lockheed. This is true of every major nation, but especially for the United States if it wants to remain the world's leader.

One of Howarth's points was also made by Vago Muradian, editor of Defense News, the leading publication in the field. He asked, if the Europeans are not willing to fight, or maintain adequate military forces, why do they need a defense industry? And how can they be expected to keep up with new technology when the United States spends seven times as much on military R&D as does the European Union ? Given the collapse of defense spending in the EU, Lt. Gen. Pollice's claim that without a better trade balance with America, a self-reliant "fortress Europe" would emerge seems an empty threat.

But Muradian did not take the next step and ask why should the United States bail out European firms whose home markets have collapsed? And an even more important question needs to be considered. How can the United States risk allowing its defense systems to become dependent on European partners who may not be able to survive over time? Italy may be a close ally at the moment, having sent troops to Iraq, but the weapon systems American is buying today will be in service for 20, 30, or more years. It is impossible to foresee what changes may occur in the international environment over such a long period. All we know is that America will continue to need a strong military built on a secure economic base.

One of the worst speakers was John Douglass, head of the Aerospace Industries Association, whose leading members (such as Boeing) favor increased freedom to outsource research and production, so as to operate their defense sectors on the same hollow basis as their commercial sectors. He claimed that the new Democratic Congress would be "more enlightened" than the outgoing Republicans (at least in the House) about working with Europe!

The European model which many Democrats have embraced is one opposed to "unilateral" actions to protect American interests, that embraces the United Nations, and which cuts defense spending to the bone. Will Douglass still be happy if the new high-tech systems his member companies are developing are scrapped by a new Congressional majority favoring higher spending on urban poverty programs instead?

Douglass was proud that the U.S. exports 40% of its aerospace production, making it one of the very few sectors of American industry that runs a trade surplus. But he misses the fact that the objective of the Europeans is to reduce this surplus. The U.S.-based defense industry is a success story, providing the country with military capabilities that no one else on the planet can match, so why the desire to change it? Yet, Douglass proclaimed that the AIA was going to make "free trade" an issue in the 2008 election, and wanted the Europeans to work with AIA in making its case!

Robert H. Trice, Senior Vice President of Lockheed Martin, made a positive contribution by being one of the few people to talk of the "800 pound gorilla in the room, China." He said that a major concern in Washington regarding American companies working with European partners is fear that technology would be passed through Europe to China. While it is important to share technology with allies in order to bolster American exports, there must be firewalls against further proliferation.

Italy is lobbying the European Union to lift the arms embargo on China, so it was not surprising that Stephen Bryen, President of Finmeccanica's U.S. affiliate, would proclaim that Beijing is not a threat. Finmeccanica is already very active in doing business in China that violates the spirit (if not the letter) of the EU ban. The ease with which corporate money can overcome concerns about national security is always disturbing. Bryen was Deputy Under Secretary of Defense in the Reagan Administration. He was responsible for technology security policy and worked to formulate national policies to protect U.S. military and commercial products, know-how and intellectual property. Now he works for foreign interests trying to undo all he had once honorably worked to build.

Another former official also spoke in favor of ignoring China. Suzanne Patrick served as Deputy Undersecretary of Defense for Industrial Policy in President George W. Bush's first term. She argued that we should not treat China as an enemy, or we will turn Beijing into one. It is a good thing she left the Pentagon, since this year's Quadrennial Defense Review states, "Of the major and emerging powers, China has the greatest potential to compete militarily with the United States and field disruptive military technologies that could over time off set traditional U.S. military advantages absent U.S. counter strategies....The pace and scope of China's military build-up already puts regional military balances at risk."

Just before Thanksgiving, a new spy story broke involving Beijing's attempts to steal U.S. military technology. It was reported that China obtained secret stealth technology used on the B-2 strategic bomber from a Hawaii-based spy ring headed by former defense contractor Noshir Gowadia. Meanwhile, AIA, the National Association of Manufacturers, and other globalized business groups are lobbying against attempts by the Commerce Department to tighten up security restrictions on trade with China.

A common theme of the globalist speakers was that policies meant to maintain a strong, domestic defense industry are Cold War relics. A number of speakers, including Douglass and Bryen, claimed that the only perils now were terrorists and perhaps a few backward rogue states. This is the view of a harmonious world that was popular in the 1990s, and which formed the setting for commercial globalization. Any realistic look around the world makes nonsense of this utopian concept. It is especially foolish when held by those in the defense industry. The reason America needs a defense industry to support a powerful military is because the world is not harmonious and stable. In the long run, the United States cannot outsource its security without putting its survival at risk.

William R. Hawkins is Senior Fellow for National Security Studies at the U.S. Business and Industry Council.
http://americaneconomicalert.org/view_art.asp?Prod_ID=2649

Posted December 29, 2006 10:21 AM
Read more on National Defense and National Security