Thread: Maybe more job losses...?

Foreign Governments Attempt to Obtain Key U.S. Defense Technologies
William R. Hawkins
Thursday, April 13, 2006

Recently, I had the opportunity to participate in the SMI International Offsets and Industrial Cooperation conference in London, March 22-23. The focus of the paper I presented the first day of the conference was offsets, which are industrial compensation packages required by foreign governments as a pre-condition for purchasing defense articles and services. They include co-production, licensed production, subcontractor production, technology transfers, counter-trade, and foreign investment. The United States, as the world’s largest exporter of defense systems and related items, is the target of foreign offset demands that can rob the American economy of the gains from defense trade, undermine the nation’s defense industrial base by outsourcing work, and erode U.S. technological superiority.

In 2003, for the first time, the total value of offsets exceeded the contracts to which they were linked. The offsets required by the foreign governments were 122 percent of the value of the U.S. defense exports. In 2004, American defense contractors reported 40 offset agreements with 18 countries. These new offset agreements totaled $4.3 billion and were associated with defense export contracts totaling $4.9 billion. European states make the greatest demands, often exceeding 100 percent of the value of their purchase in an attempt to transfer production work and technology to their ailing defense industries. Indeed, during the period 2000-2004, European countries received offsets equal to 107 percent of the value of export contracts for U.S. military equipment. During this same period, the United States ran a trade deficit with the combined members of the European Union of $402.4 billion.

Given the current large and growing U.S. trade deficit, the imposition of offset requirements on weapons systems and associated products and services is particularly galling. It is an outright attempt to subvert America’s comparative advantage in military-related industries. Americans are told by their political leaders and other assorted free trade cheerleaders that they must accept a loss in competitiveness in a number of consumer goods categories, from electronics to automobiles, and should concentrate their efforts in their areas of comparative strength. Yet, when the United States has a clearly demonstrated competitive advantage in a major sector, such as armaments, its customers demand offsets to prevent the American economy from fully realizing the gains from trade – and the free trade types do nothing. As the Commerce Department’s Bureau of Industry and Security has reported, “Almost 80 percent of offset transactions reported for the 1993-2004 period fell in the manufacturing sectors of the U.S. economy, eroding U.S. production and workforce capabilities and the balance of payments benefits of the export.”

The presentation by European officials at the conference confirmed my contention that European policy-makers have devised industrial strategies that fly in the face of their free trade rhetoric. Sigitas Dzekunskas, Lithuania’s Director of Procurement, stated that the goal of his country’s offset policy was “to attract the capacity of foreign modern arms-manufacturing enterprises [including] their experience, state-of-the-art technologies, etc.” A presentation by David Hew, of the Asia Pacific Countertrade Association, stressed that India, as a rising power, believes that “just maintenance, repair and overhaul is not enough. India wants to design, develop, innovate and be an exporter” of military equipment, and will use offset demands as one way to gain the means to expand the capabilities of its defense industry.

George von Rosenschild of France’s Procurement Policy Office made a somewhat perplexing presentation that left most of the audience still confused about the details of French policy execution. However, what was clear is that Paris intends to dominate the restructuring of the European continent’s defense industry.

The conference took place during the height of the debate over whether the transfer of technology from the U.S. Joint Strike Fighter (JSF) project to England might migrate into other European projects that would be rivals to future American efforts. The JSF issue is a bit different than the usual case. Aerospace firms tend to favor offsets to get deals made, and object to government “interference” predicated on broader concepts of national security. As the large defense prime contractors become systems integrators rather than manufacturers, it matters little to them whether subcontracting is done in the United States or overseas. If they have to outsource some of the production work, or invest in foreign operations to win a bid, they will do so even if it means weakening the American supply chain or reducing domestic industrial capacity.

But in the United Kingdom’s demand for technology as an offset, it is prime contractor Lockheed Martin that is opposed to giving up its proprietary stealth knowledge, while the UK government is trying to push through the deal at the diplomatic level. Indeed, the week before I traveled to London, Lord Drayson, the UK’s Minister for Defence Procurement, was in Washington lobbying for the JSF offset, and the funding of a second jet engine for the aircraft to be built in England. Earlier in the year, Drayson had released a White Paper on what capabilities and skills the UK needed to protect over the next 10 years and to produce at home for strategic reasons. All of America’s major trading “partners” have policies aimed at giving themselves the largest piece of the industrial pie as possible. It is past time for the United States to do the same.

An example presented at the London conference by Turkey crossed another line. To fulfill an offset demand, Sikorsky had to make the Turkish firm ALP Aviation the sole source for tail rotor drive shaft assemblies not only for the helicopters it sold to Turkey, but also for all Sikorsky helicopters world-wide. In other words, an entire piece of the U.S. defense industrial base was sent overseas to fulfill an offset demand.

Offsets are also spreading to non-military sectors of government procurement. Foreign firms that participate in large public works projects or other government-funded programs will be the next targets. Other governments are unwilling to allow major trade deals to undermine their domestic production capacity or send their balances into deficit. Free trade is not a theory anyone outside the United States takes seriously, let alone practices. Even England, America’s closest ally, and a public exponent of free trade, has demanded an average offset of 85% when buying U.S. military systems during the 1993-2004 period. My complaint is not that London is trying to protect its interests, but that too often Washington does not act to protect America’s interests.

I argued that the U.S. government must exercise more oversight of the offset deals that take place between American firms and foreign governments to limit the damage to the nation’s defense industrial base and to promote trade that yields a net benefit to the domestic economy. U.S. policy has been to allow private firms to cut whatever deals they could. However, an Interagency Working Group under the chairmanship of the Pentagon was created in 2003 by Congressional legislation to investigate the rapid growth of offset demands. The group lacks, however, the authority to deny or mandate changes in agreements. In can only “consult” with foreign governments on the issue, which is insufficient to change practices that have proven so favorable to overseas interests, and which they will not voluntarily abandon.

Calling for the U.S. government to set parameters limiting what foreign governments can demand of American defense firms was not a popular proposal in a room filled with people who devise offset packages meant to plunder American corporations, but it did provoke some very interesting discussions. It was pointed out to me that the U.S. has various “buy American” provisions on the books for military programs, and that for all practical purposes, a European firm has to locate at least some of its operations in the United States if it expects to place a credible bid on a military project. I readily agreed, arguing that given the role of the United States as the only truly global military power, we needed a robust and independent defense industrial base to support our preeminent position in the world arena.

But I also pointed out that the trend in America has been for officials to waive these requirements for U.S. content and to even make a show of buying foreign systems, as in the case of the purchase of Augusta Westland (British-Italian) helicopter for the White House fleet and the acquisition of several major foreign systems for use in the Navy’s new littoral combat ship. As the rest of the world becomes more protectionist in defending their industrial assets, the U.S. is taking “free trade” notions to an increasingly untenable extreme – one where they are now endangering the economic foundations of national security.

As Maurice Pearton, a British scholar associated with Cambridge University and the Institute for Strategic Studies, has written, “The first consequence of industrialization for foreign policy was to increase the number of levers available. It introduced a qualitative difference between states, similar to that between weapons: henceforward, the international order was divided between those state which possessed the materials, skills and facilities to manufacture the improved weapons and techniques, and those which did not. Industrialized states had more options....Non-industrialized state could either develop their own capacity or become dependent on those who had it.”

It should be the unswerving policy of the United States to stay not only among, but atop, those countries with the qualitative advantage in world affairs of being able to manufacture its own advanced weapons.






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William R. Hawkins is Senior Fellow for National Security Studies at the U.S. Business and Industry Council.


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We are being sold out on every single level, even our military expenditures.

Oooh, please God, help us end this nightmare.

we're being destroyed by the enemy within