August 8, 2005    Volume 12, No. 15

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Heritage Foundation Says Congress, DOD
Should Learn To Live With Globalization;
Providing Troops With Best Equipment
Usurps Making It In America


The debate over what to do about the U.S. defense industrial base is intensifying, as foreign factories are supplying more components and subsystems that make up the U.S. arsenal. But the worry is misplaced, argues the Heritage Foundation after studying the issue for the past eight months. There is no way to stop globalization, so those people expressing so much angst should accept it for what it is: an opportunity for the U.S. military to equip its soldiers with the best technology made anywhere in the world.

The debate pits those who believe the U.S. needs to adopt policies that ensure a strong base, who are generally labeled as being protectionists, against those who believe in letting the global free market work without any hindrance placed upon it by centralized federal control.

Responding to the rising concerns of conservative defense hawks worried also about the rise of Communist China's industrial capacity, the Heritage Foundation jumped into the debate. "No organization is better positioned to bridge the gap between [military and economic] perspectives than is the Heritage Foundation," the group writes in a new report on the subject. "We have a rich history of supporting strong national security policy as well as advancing the principles of free markets. For this reason, we believe it is our responsibility to address this issue."

For all intents and purposes the economic "free-marketers" won the internal Heritage Foundation debate. "The Heritage Foundation has been clear from the beginning of the project that we will not back down from our commitment to free markets," it writes in its report titled "The Military Industrial Base in an Age of Globalization: Guiding Principles and Recommendations For Congress." "We also understand that the military 'market' is unique and that we could not allow our commitment to free enterprise to cloud our vision of what is right for national security."

As a result, concessions were made, because the highly charged nature of the issue has the potential of creating a rift within even an organization like Heritage, according to some of those involved with the study.

Heritage wants conservatives in Congress to stop promoting "Buy American" proposals that would require federal agencies to purchase a larger share of goods from U.S. producers. Requiring agencies to buy from American producers does not solve the problem, but makes matters worse. In its report, Heritage provides the rationale for abandoning a "Buy American" approach to the problem.

"The seemingly arcane nature of the military industrial base relegates most debate over it to the halls of Congress, small offices in the Pentagon and the boardrooms of America," according to the Heritage Foundation report. "Yet the decisions made today regarding the military industrial base affect every American and will influence the armed forces for decades to come, just as decisions made over the past 100 years continue to have ramifications...As critical as the military industrial base is to U.S. national security today it, it is not a new issue."

Project leader Jack Spencer, senior policy analyst for defense and national security at the Heritage Foundation, sat down with Manufacturing & Technology News editor Richard McCormack at Heritage headquarters on Capitol Hill and discussed how the debate over preserving the defense industrial base should be "flipped on its axis." Here's what he had to say:

Question: How do you reconcile the conservatives on national security issues with the conservatives on economic policy issues?
In our opinion, national security should always trump the free market, but we're committed to free markets and we did not want to back down on our commitment to free markets as we went through this process. It just so happens that as we analyzed the arguments we heard from people who did not agree with us we found that they were really parochial in nature. It reinforced our belief that the commitment to free markets is how you genuinely best protect national security. Some of the things in [our report] run counter to our economic policy people and are different than what they would have said otherwise.

Q: Do you think the United States needs to have a strong manufacturing base in order for it to have a strong national security force?
We believe that we should focus our efforts on access to what our men and women in uniform need rather than being able to manufacture here in the United States. If getting them what they need when they need it means that it should be domestically produced, fine. A nuclear submarine probably should not be contracted out to the Chinese. I would, however, say that for most other things that it's okay to let the market decide where we get things from.
Our belief is that subjected to the free market, the United States is still going to produce most things because our comparative advantages are innovation and new technology. If liberated from protectionism, we can compete and that is where we will always emerge as winners. The free market is how we do best national security-wise either way.

Q: So you have no problem with the massive shift of high-tech production offshore and its implications for the U.S. military?
If you accept that the world is globalized then we should make our focus on maintaining access to things instead of producing them ourselves. One of the keys in order for that system to work is knowing where you get things from. If you don't know where you get things from and you just know that it's not here in the United States, then you increase your risk substantially because if a potential adversary knows where you get things from it becomes a leverage point that they can use against you.
Since we are going down this road of increased globalization of getting a larger percentage of our parts abroad, then we should know where they come from at all levels of production. That is the next problem that we face. And it's not a problem that we face today because we still don't depend substantially on things coming from abroad, though its growing every day. It's a problem that will increase significantly and quite swiftly over time.
Once we know what it is we get and where we get it from, then we have to be careful not to use that knowledge as a further reason to protect American industry. Rather, it should be a hedge against a foreign competitor using it against us.
So our conclusion is with globalization comes transparency, which we don't have right now.
That is one of the areas where we found a lot of disagreement among all of the experts. You talk to someone like Suzanne Patrick [former Undersecretary of Defense for Industrial Policy] who says, "We know where we get everything. We've done foreign-content studies. We've gone down to the second and sometimes third tier."
Well, what about the fourth, fifth and sixth tiers? Once you start asking that question, they start giving you answers such as, "It's too difficult," or "It's unknowable."

Q: Would a system of reporting the location of production be intended specifically for defense enterprises?
Yes, that's all we address.

Q: But a lot of what the Pentagon is buying is commercial off the shelf technology. It's dual use. Are you going to require that Cisco disclose where it makes a switch before it's able to sell it to the Defense Department even though it's a commercial product being used in a military application?
There needs to be an understanding of where that switch comes from.

Q: So Cisco would have to report to the Pentagon that its switches are coming from China?
There needs to be some safe mechanism -- and it doesn't have to be every single item -- for that information to be shared. Knowing where things are made becomes part of the equation for DOD. If they get a certain item from different places, that decreases the risk as well.
I don't expect Cisco Systems to give all this information because the way the system is set up right now I can almost guarantee it will be used against them. But the alternative is to protect everything and continue manufacturing it here. Then you have the same problem of Cisco saying this isn't made here and then people will say we need to make those here. You see that issue emerging with semiconductor chips and all kinds of other things. There is a huge movement on Capitol Hill to prevent these things from going abroad and it's a huge problem. What we're saying is we shouldn't fight it. Not only should we not fight it, but it's not a bad thing. Yet we need to know where it comes from and what is the risk associated with it coming from there.

Q: The number-one guiding principle in your report is for Congress to eliminate "excessive central control." That seems to run counter to this proposal of creating a system of transparency. If you start requiring contractors to report on everything they sell to DOD, aren't you going to need some type of central control for that repository of data?
Knowledge of something and control over something are very different things. Look, we're not going to back down from our commitment to the market. We recognize that the military market is unique and that you usually do have a monopsony situation and that it's not the same as a free and open market. We recognize that. What we're trying to protect against is using that as an excuse for having unsubstantiated protectionism such as Buy America. That is the reason we did all of this. We're trying to provide context as to why Buy America is not the right way to go. We're trying to provide context and framework as to why a free market is best for the United States. We show that whenever you over-protect anything like the ship industry, that it's the ship industry that can't compete.
It may have been a good idea to protect the ship industry when that legislation was enacted for a year or two or 10, but what it allows in the long term is a perpetuation of the status quo. It stymies innovation. That level of over-protection created opportunities for the Chinese, the Australians and any other number of people to leap ahead of the Untied States and its capabilities militarily and commercially for these sectors. That is the whole point.

Q: How would you require companies to provide the government with the information on where everything they sell to the government is made?
I'm not sure how to do it yet, but I'm confident we can come up with a way because the private sector is not going to want to give the government any information that the government can then turn around and use against them. You had that same dynamic in the initial months and years after September 11, when you had chemical companies that didn't want to provide information. But they're working through that and it might provide a pretty good model for what to do here.

Q: There is a connection that people are making and have been for a while, that if production goes overseas, then you're not creating the wealth that is needed by our society to support a robust military. You see the wealth of the country being drained in both the trade deficit numbers and the budget deficit numbers.
This gets into economic issues and I'm not an economist, but I will say this: People assume that the trade deficit is some horrible thing. Our economists say consistently, "Who cares about the trade deficit? What does that really matter? We have very low unemployment." The problems that arise come as a function of anti-market mechanisms. If you subject the economy to the market, then you will have the United States competing in any number of areas. Production has not gone down in the United States. People throw out these manufacturing numbers saying we don't manufacture in the United States. But it's not true; we produce as much or more as we ever did.

Q: There are questions about whether U.S. companies are competing in a free market because they're competing against state-owned enterprises in China, or companies that receive untold numbers of subsidies and tax breaks or don't have to abide by the rule of law, especially with regard to intellectual property. Their good ideas and intellectual property are being stolen. So it's great to have a reliance on free markets, except in a global economy, the free market isn't free. Foreign companies are winning market share by cheating.
Should the Department of Defense and the men and women in uniform be the ones who pay the price for that? We argue no. As long as they have what they need when they need it in a timely manner and it's the best available, they should not be subjected to these political debates.

Q: Do you think it's okay for the Chinese to be equipping the U.S. military?
Are you going to tell a young 19-year-old Marine that he can't go to the local REI shop and get a set of waterproof gloves that were made in China? Because that is what you're telling him. You're saying his government can't go do that. I don't think you can tell him that. That should be the focus here -- on the men and women in uniform. All these other things are important but it's for other people to take care of. The Pentagon should not be the ones paying the price for that.
Secondly, show me an example of where we didn't have what we needed to fight and win a war in this global environment? We just fought one of the most controversial wars in a long time with Iraq. The French provided us what they needed to provide us. Everybody gave us what they needed to give us. Contracts were upheld. Contracts were maintained. The one example that the [anti-free market people] cite [of a product that wasn't provided by a foreign contractor] is the Swiss and the JDAM crystal. It took us 72 hours to have two separate fixes on that.

Q: In all of your meetings and discussions, did you hear of any other examples beyond that one?
No. That's it! That's it! First of all, the Swiss company came around and said, "There was a mistake, here is your JDAM crystal." And, by the way, the manufacturers themselves got on a plane and figured out a way to get new ones. Within that amount of time not one Iraqi target went un-bombed. So until you start showing me some evidence that you're not going to have access -- after we have just gone through this war -- then I'm not buying it.

Q: But that's the Swiss. What happens when hundreds of high-tech components like those crystals have to come from China?
As we rely more and more on China, they could use that as a leverage point against us because they could be the adversary, and if they are the adversary, they will use those leverage points against us. That comes back to the transparency. They can't use it against us if we know where it is, or at least it provides us with time because war with China doesn't happen overnight. War with China happens at the end of a chain of events. As you begin down that chain of events, then you need to understand, "Where do I get this widget from? Does this widget come from China and if so, can I build it in Peoria? If I can't build it in Peoria, I need to figure out a place where I can build it. And if I can't build it in Peoria I should be able to scour the globe for it and have the channels in place to easily scour the globe for it."
That is why you focus on access. That is where the transparency and access equations come together.

Q: So there is no real worry about the production capability of the United States?
When people start making these arguments that we have to be able to do it at home, no we don't. We just don't. And if we can, great. If I can buy my ammunition at home and Americans can have jobs and Billy and Sally can get an education and their parents never have to go on welfare, well that's just dag-gone perfect, but if that's not the case, then we shouldn't have men and women in uniform who don't have the best weapons when they need them because our government is making the wrong decisions.

Q: Do you think that providing U.S. taxpayer dollars to foreign companies to give them the capability they need to innovate and develop new technology and also produce it for adversaries is okay?
What does it mean when you keep technology here? Does it mean that you're not sharing it with the Brits or Australians? So that's another one of our principles: that not all trading partners are created equal. We would take a more open approach to almost all defense technologies with a small handful of allies.


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