In the Pentagon’s 2004 report Foreign Sources of Supply: Assessment of the United States Defense Industrial Base, the use of foreign sources for the production of military goods for the U.S. armed forces is advocated because importing “promotes consistency and fairness in dealing with U.S. allies....[and] encourages development of mutually beneficial industrial linkages that enhance U.S. industry's access to global markets.” One small problem with the Pentagon’s thinking: America’s “allies” often do not behave in ways that are either fair or beneficial to our interests.
America had a 2004 trade surplus in aerospace products of $31 billion, virtually the only bright spot in an overall trade deficit of $618 billion. The aerospace figure is somewhat misleading, however, because foreign governments usually require industrial compensation to offset the cost of buying U.S. weapons systems. In defense trade, offsets include mandatory co-production, licensed production, subcontractor production, technology transfer, counter trade, and foreign investment. Countries require offsets for a variety of reasons: to ease the burden of large defense purchases on their budgets, to increase or preserve domestic employment, to obtain desired technology, and to promote targeted industrial sectors.
So, we have a significant trade deficit which pays for a relatively small surplus from the aerospace industry. And, that surplus is misleading.
(In other words, America is getting screwed.)
Congress has required an annual report on the impact of offsets in defense trade, prepared by the Department of Commerce’s Bureau of Industry and Security under the 1992 amendments to the Defense Production Act. The most recent report, issued in March 2005, found that for 2003, new offset agreements had a total value of $8.9 billion, equaling 121.8% of the $7.3 billion in exported defense items. This means that the American economy is giving up more than it gains when it sells military products to many of our overseas friends.
The stuff we sell goes for $7.3 billion, but it costs us $8.9 billion in kickbacks to sell it!
(In other words, America is getting screwed.)
European nations received offsets equal to 148.8% of the total value of our exports to them. For non-European nations the average was 48.4%. Developed countries with established defense industries, like the Europeans, use offsets to channel work or technology to their domestic high-tech firms, which are rivals to American firms. Countries with newly industrialized economies utilize both military and commercial offsets to transfer technology and know-how to expand their capabilities. Offsets can displace U.S. subcontractors when they require work be outsourced or when American firms lose future contracts to rivals who have benefitted from offsets.
We transfer American jobs and American know-how to countries that either sell weapons to our enemies or are one step away from being enemies themselves.
(In other words, America is getting screwed.)
Even American companies that are not involved in defense projects can be harmed by offsets – because they often entail “indirect” compensation in commercial sectors, including direct purchases, investment in foreign enterprises, technology transfers, and training. These offsets can have a long term impact because they help create new trade rivals, even in the commercial sector. American firms may not even realize that they are being targeted by the offset process. A 1998 GAO study entitled “U.S. Contractors Employ Diverse Activities to Meet Offset Obligations” found that defense contractors even “assisted foreign firms in marketing their products in export markets using the expertise of the contractors’ own organizations or consultants.”
So even innocent American industries who have nothing to do with arms sales suffer.
(In other words, America is getting screwed.)
Even with increasing offsets, European Union countries have dramatically cut their purchases of American weapons. These countries bought $1.4 billion in arms from the United States in 2003, down from $3.5 billion in 2000. Eastern European countries that joined the EU in 2004 may appear to be a better potential market for U.S. defense companies, but could be difficult to hold. The EU is pressuring members to “harmonize” policies in favor of consolidating a stronger European industrial base meant to compete with the United States.
So despite the fact that we are kissing their &#%$@ to make the sale, we're not kissing it enough, so business is going down.
(In other words, America is getting screwed.)
The European Aeronautic Defence and Space Company (EADS), a consolidation of French and German companies with some Spanish participation, has been a major beneficiary of the EU trend to buy more from continental sources. EADS owns Airbus, which means its “buy European” argument has impacts on the commercial side of the international economic competition as well. Airbus beat Boeing and Lockheed Martin to a 20 billion euro contract to supply seven European countries with 180 new military transport aircraft, the A400M. In January 2004, EADS scored a major win when the UK Ministry of Defence (MoD) picked Airbus to supply refueling aircraft, a type that has long been a Boeing specialty. Airbus promised that half of the work on the new planes and 90% of the conversion work on older A330 aircraft, would be done in the UK.
And, after all that, the UK refuses to buy American.
(In other words, America is getting screwed.)
Yet, as long as European military budgets remain small, continental defense firms are going to have a difficult time staying competitive in the long run. This is why European firms are pushing so hard to gain access to Pentagon contracts. They need to tap into U.S. budgets to compensate for the collapse of EU military spending. As Richard Olver, chairman of BAE told Defense News (Feb. 28, 2005), “It's obviously clear that the extent of R&D in the United States is a very different order of magnitude to the R&D investment in the rest of the world, including the United Kingdom....so our first line of strategy is to have a bias to grow in the United States. High R&D, high budget, high reputation with the customer.”
So, despite all the business the Europeans monopolize for themselves, they still can't make it, so they seek to sell weapons to America, even though they won't buy weapons from America.
(In other words, America is getting screwed.)
The United States does not, however, demand offsets as do the Europeans. This makes for an unbalanced trading system in military products that undermines the long-term superiority of the American industrial base upon which the country’s world leadership depends. I recently had the opportunity to engage in discussions with the “interagency team” assigned by the Secretary of Defense to “consult” with foreign nations on limiting the use of offsets. The team consists of officials from the Defense, State, Commerce and Labor departments, and the office of the U.S. Trade Representative. Unfortunately, because Washington has unilaterally adopted a much more open trading posture than Europe, it doesn’t have much leverage to bring to the table. Indeed, the use of the term “consult” rather than “negotiate” indicates a weak effort.
So America is doing nothing about it.
(And, remember: America is getting screwed.)
This situation calls for more creative “buy American” provisions to transfer production capacity and innovation from Europe. In the Pentagon’s 2005 Industrial Capabilities report, it is stated that foreign direct investment in the U.S. defense industry has jumped 198% in the 2000-2003 period, or about $3.5 billion, even as Foreign Direct Investment (FDI) in the general economy was declining by 12%. Why is this so? Because foreign firms know that they must weather political criticism in Washington. They have a better shot at US contracts if they locate at least some of their operations here. This is the kind of development Pentagon policy should be encouraging, rather than overseas outsourcing.
Foreign direct investment is down, but FDI in the defense industry is way up.
They are buying our defense industry.
(In other words, America is getting selectively screwed.)
But it must be real FDI, the kind that truly enhances U.S. military and industrial capabilities, not just assembly work. EADS, for example, has been waving the prospect of a major aircraft assembly plant before a number of communities (and their politicians) as part of its drive to win the contract for the next generation of strategic aerial refueling tankers. The catch is that EADS only wants a location near a deep water port, so it can import all the high-tech and truly valuable components of the aircraft and not actually produce much of anything in the United States. FDI of this sort must be seen for the scam that it is and be closely monitored. No one should be fooled for a minute that the EADS Trojan Horse operation is a “mutually beneficial industrial linkage.”
Nice of them to throw us a bone.
(America is getting screwed.)
The proper goal of U.S. policy is not to be “fair” but to be successful. Today we are failing miserably at that goal.
Did I mention that America is getting screwed here?
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