Department Of Defense Goes Global

Dec. 21, 2004
Congressional debate over defense-spending requirements mirrors U.S. consumers' growing ambivalence over where products are made.

If the Department of Defense doesn't think it should have to buy U.S.-made weapons and defense systems for the U.S. military, why should an American citizen feel the least compulsion to buy an American-made car? That question should frighten manufacturers troubled by the foreign exodus of production and assembly activity. The Pentagon's proposal, presented to Congress in April as "The Defense Transformation for the 21st Century Act," requested that the Secretary of Defense -- Donald Rumsfeld and his successors -- have broad authority to waive domestic-source requirements when those requirements "are not in consonance with security interests." The Defense Department's point of view is familiar to any manufacturer sourcing components or manufacturing abroad. The repeal of such requirements would promote competition and lower costs -- by $5.5 billion per year according to an estimate published by Defense Week. The military says current regulations restrict its purchasing flexibility and do not allow the Defense Department to obtain the best available equipment as quickly as it would like. It would also make it easier for U.S.-based contractors to sell defense-related products and equipment in foreign markets. Outside of the Pentagon, such arguments aren't quite so straightforward. In late May the protectionist point-of-view found a voice in the "industrial base" provisions included in the 2004 Defense Authorization Act that was approved by the House of Representatives. As passed, the bill would increase the percentage of domestic components required in items purchased by the Pentagon from 50.1%, where it now stands, to 65%, and close loopholes granted to a number of nations by the Department of Defense. It also adds items to the list of those that must be made exclusively in the United States (tank tracks, fuses, and aircraft and vehicle tires), and establishes a $100 million fund to help maintain the production capability of critical defense items. The strengthened buy-American provisions in the 2004 Defense Authorization Act are backed by Republican Rep. Duncan Hunter of California, chairman of the House Armed Services Committee. He believes the country has allowed its industrial capability -- with regard to defense in particular -- to erode too far. He says Congress needs to act to identify critical weapons and military supplies and protect the U.S.' ability to make them. His effort is supported by U.S. shipbuilders, who are currently shielded by a federal statute that requires that the hull and superstructure of military ships be built in U.S. shipyards. The current rate of production, just six ships per year, the lowest rate since 1932, is contributing to high costs in the shipbuilding industry, according to the American Shipbuilding Association (ASA). "Our military might comes down to the strength of our industrial base," says Cynthia Brown, ASA president. "If America is going to remain strong and in charge of her own destiny, she's going to have to have the industrial capability to build the weapons systems to keep us free." On the other side of the debate is the U.S. aerospace industry, which reportedly sells 40% of its products abroad, accounting for a $30 billion export surplus in 2002. The Aerospace Industries Association (AIA) says the provisions in the legislation would rob the Defense Department of buying efficiencies and cause costs to skyrocket. It would also hamper its members' ability to sell their systems to many of the United States' allies. "The Defense Department would have to pay more for its products and wouldn't have access to the most advanced electronics and information technologies from the commercial marketplace," the AIA noted in a prepared statement, adding that a number of these systems are no longer manufactured in the United States. As of early August, the House draft of the defense authorization bill and the Senate version, which does not contain the fortified buy-American provisions, were being reconciled in committee. A key issue in the dispute is so-called "offsets," incentives offered by U.S. companies to foreign governments for buying military products and services. For the six-year period from 1993 to 1999, defense companies reported entering 307 offset agreements with 34 countries. These included client-country subcontracts and procurement, technology transfers and joint ventures. The bulk of these offsets have been with European countries, and 90% are aerospace-related. During this period, weapons systems alone accounted for a total export contract value of $40.2 billion, with related offset agreements totaling $22.3 billion. In 2001 a Congressional Commission formed under the Defense Offsets Disclosure Act reported that while offsets boost sales by facilitating exports, they also supplant work and jobs that would normally go to U.S. firms. It also found that much of the technology transfer activities from these agreements seems to flow one way -- out of the country. The Commission was supposed to submit updated recommendations almost two years ago, but it hasn't even met in recent years because five executive-branch positions have not been filled by the current administration. Regardless of what happens in Congress, at the heart of the debate is the question of how strong and self-reliant American's defense industry needs to be in order to support a strong national defense. Who's winning the argument may become clear next summer when the Marine Corps is scheduled to announce its choice of new helicopters for the presidential fleet. The request for bids hasn't gone out yet, but the choice will most likely be between aircraft manufactured by Stratford, Conn.-based Sikorsky Aircraft and its rival, the British-Italian conglomerate Agusta Westland. Political representatives on both sides of the Atlantic, including British Prime Minister Tony Blair, have already begun to plead the case for their constituencies. Missing from policy-makers' radar screen lies an even bigger question: How strong of an American manufacturing industry is necessary to support a strong American economy?

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