The legacy of the draconian cuts in military force levels and
procurement during the 1990s continues to cast a pall over U.S.
national security planning. That American soldiers and Marines have
been overstretched by repeated deployments in Iraq and Afghanistan is
well-known, and steps are being taken to expand their strength. It is
not just the combat forces, however, but the defense industry upon
which they depend for arms and equipment, that also needs to be
The "procurement holiday" of the Clinton
administration cost the defense industrial base a million jobs. The
Pentagon promoted a consolidation of firms and elimination of "excess"
capacity. This reform was supposed to improve efficiency but it also
reduced domestic competition. Now, to stimulate competition, or even
just access sufficient capacity, foreign firms are invited to supply
U.S. forces with hardware. The most recent example is the awarding of a
$35 billion U.S. Air Force contract for 179 new KC-45A aerial refueling
tankers based on the Airbus A330 airliner built by European Aeronautic
Defense and Space Company (EADS). Boeing has built every previous USAF
tanker and has won contracts for its KC-767 tankers from Japan and
Italy. But it lost the military competition at home to the foreign firm
that is also its main global rival in the commercial airliner sector.
USAF contract comes at a critical time for EADS. Its A380 "superjumbo"
airline project is well behind schedule, and there have been problems
in the Airbus A350 midsized airliner project (crucial to its future
battles with Boeing), and in its A400M military airlifter. EADS is
Europe's largest defense contractor yet is much smaller than Boeing
because Europe went on an even deeper disarmament slide after the Cold
War and has done little to reverse course.
NATO armies deployed to stop a Soviet blitzkrieg across Germany have
melted away to where they can hardly maintain a few brigades in
Afghanistan to fight lightly armed insurgents. European firms are
desperate for American taxpayers to bail them out with military
contracts. The question is: Can the United States depend on a steady
supply of production, including decades of space parts and upgrades,
from foreign industries in decline — and where military investment and
research are funded at only a fraction of what America devotes to
Faced with adversity, how defense contracts affect
the larger economy is given great attention in Europe. When an American
firm sells military equipment in Europe, it must provide "offsets"
against the cost of the contract. Such offsets include mandatory
co-production, licensed production, subcontractor production,
technology transfer, counter trade, and foreign investment.
object is for the buyer to recoup as much as possible from the seller.
According to a December report by the Commerce Department's Bureau of
Industry and Security, "During 1993-2006, U.S. companies reported
entering into 582 offset agreements with 42 countries related to export
sales totaling $84.3 billion. These offset agreements were valued at
$60 billion and equaled 71.2 percent of the export contract value." For
European countries, the offsets equaled 97.7 percent of contract value.
an offsets conference I attended in London last year, a Turkish
official recounted how, in order to fulfill an offset, Sikorsky set up
a joint venture with local partners that became its sole-source
supplier of tail rotor assemblies — including for helicopters sold to
the U.S. military. Thus, an entire piece of the American defense
industrial base was moved overseas.
The Airbus A330 has
components built in Britain, Germany, France and Spain, the result of
"work sharing" negotiations between the governments. This is not very
efficient, but Airbus has received heavy government subsidizes to be
more competitive in world markets. The United States is still pursuing
action at the World Trade Organization against EADS, alleging illegal
export subsidies for its commercial aircraft programs. Yet, the case
did not disqualify EADS from the USAF contract.
Boeing will protest the contract award on procedural grounds, but
the debate should become broader to include an assessment of how such
projects affect the nation's ability to meet military needs securely
At a Senate Armed Services Committee hearing
March 12, Air Force Secretary Michael Wynne conceded that industrial
issues had not been taken into account when awarding the bid. "The way
our industrial base is shrinking is something the Congress should take
a look at," Mr. Wynne said.
There are "Buy America"
provisions that apply to this project from which the country benefits.
At least 50 percent of the value of the contract must be done in the
United States, and EADS had to take an American partner to have any
chance of winning the bid. As a result, the KC-45A's European-made
airframe will be assembled in Alabama by Northrop-Grumman, its General
Electric jet engines will be built in Ohio, and its refueling system in
Domestic content rules are vital to sustaining
production capacity and should be expanded. The United States needs to
use the leverage of its large market to promote "in-sourcing" by
foreign firms to bring capital and technology into the American economy.