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June 20, 2008

Exclusive: Tanker Bid Shows Weakness of U.S. Policy

William R. Hawkins

The Government Accountability Office (GAO) ruled June 18th in support of Boeing's challenge of an Air Force decision to award s $35 billion contract for 179 new air refueling tankers to a consortium headed by Northrup Grumman. The choice of Northrup Grumman was controversial because it had chosen to base its KC-45 design on a foreign airliner, an Airbus A330 built by European Aeronautic Defence 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.

The Boeing challenge was based on procedural issues. The GAO recommended that the Air Force conduct a new competition for the tanker contract after finding that the service did not treat Boeing fairly during the bidding, and that a variety of costs for both aircraft were not properly considered. "Our review of the record led us to conclude that the Air Force made a number of significant errors that could have affected the outcome of what was a close competition between Boeing and Northrop Grumman," Michael Golden, GAO's lead counsel for procurement matters, said in a statement. Though it was a surprise that the GAO would go against the Air Force, it is not at all surprising that the competition had been slanted in the favor of Northrup-EADS.

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 reconstituted.

The "procurement holiday" of the Clinton administration cost the defense industrial base a million jobs. The Clinton Pentagon promoted a consolidation of firms, and the elimination of "excess" capacity. This reform was supposed to improve efficiency, but it also reduced domestic competition. Now, in order to stimulate competition, foreign firms are being invited to supply American forces with hardware. To have credible competition, the Europeans have to win some big contracts. So the fix was in.

The USAF contract would have pumped needed funds into EADS at a critical time. Its A380 "superjumbo" airline sales are well below expectations. There have been problems in the Airbus A350 midsized airliner project (crucial to its future battles with Boeing), and with its new A400M military airlifter, which is 12 months behind schedule. EADS is continental Europe's largest defense contractor. Yet, it is much smaller than either Boeing or Northrup Grumman because Europe went on a very deep disarmament slide after the Cold War, and has done little to reverse course. The once mighty NATO armies deployed to stop a Soviet blitzkrieg across Germany have melted away to where they can hardly maintain a few battalions 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 U.S. depend on a steady supply of production, including decades of space parts and upgrades, from foreign industries in decline?

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 from its inception so it can make competitive bids. The U.S. is pursuing action at the World Trade Organization against EADS for its use of illegal export subsidies. The WTO case should have disqualified EADS from the USAF bidding, but didn't.

Under the Northrup-EADS plan, the Airbus components would be shipped to Alabama for assembly by EADS, and then converted into the final military tanker configuration by Northrup. When EADS was looking for a U.S. site for its assembly plant, it made the stipulation that it had to be near a deep water port so parts could be transported in from Europe, rather than made in America.

The tanker debate should become broader than procedural questions. It should include a full assessment of how such projects impact the nation's ability to meet military needs in a secure and reliable manner. At a Senate Armed Services Committee hearing March 12th, then Air Force Secretary Michael Wynne conceded that industrial factors had not been taken into account when assessing the bid. "The way our industrial base is shrinking is something the Congress should take a look at," Wynne said. Congress was waiting on the GAO decision before acting. And while the GAO ruling is not binding, it will carry weight and hopefully give the critics the opening they need.

Rep. Duncan Hunter (R-CA), the ranking member of the House Armed Services Committee, had an amendment accepted at the May 15 markup of the FY 2009 Defense Authorization bill that would ban future Pentagon contracts from being awarded to firms against which the U.S. has a pending WTO case. If the tanker bidding is reopened, the ban would apply, but it has to survive the House-Senate conference. The Senate Armed Services Committee did not include equivalent language. It has been less supportive than the House in the effort to rebuild the domestic defense industry, adopting a much more "free trade" attitude towards the use of foreign equipment by the U.S. military.

Those who want to base national security on academic economic theories should be aware that Adam Smith carved out an exception for defense industries. On the topic of the Navigation Acts, the centerpiece of British mercantile policy, Smith wrote in The Wealth of Nations that the "defense of Great Britain depends very much upon the number of its sailors and shipping. The act of navigation, therefore, very properly endeavors to give the sailors and shipping of Great Britain the monopoly of the trade of their own country." He approved of paying bounties for the production of naval stores in the American colonies so the empire would be less dependent on the importation of strategic goods from foreign sources. Smith believed, "It is of importance that the kingdom depends as little as possible upon its neighbors for the manufactures necessary for its defense."

America requires a strong fleet just as much as did the British Empire, and in the 21st century that includes an air fleet. The same logic holds for assuring U.S. superiority both in the air and at sea. The country must remain dominant in the industrial and technology sectors of the economy that create the military aircraft and warships. The country cannot "outsource" its means of self-defense. As John Bolton, who served as Undersecretary of State for Arms Control before becoming U.N. Ambassador, argued in a Washington Times op-ed June 17th, "There is no justification for putting this unimaginably important capability at risk by manufacturing critical elements of it abroad. It is not enough to say that EADS is largely owned by allies of the United States, because we may well differ with allies on key issues of national security."

In their analysis of the Boeing-Airbus competition for world leadership in the aviation industry, John G. Francis and Alex F. Pevzner concluded in the Winter 2006-07 Political Science Quarterly, "We submit that the inability of America to maintain dominance in the large commercial aviation market is, in large measure, the result of the Western European achievement of acting as a strong state in this particular global sector." The other side of the coin is that Washington has acted like a weak state. The GAO ruling gives Washington another chance to act with the strength the country needs to remain on top, and support American production over that of a foreign rival.

Family Security Matters Contributing Editor William Hawkins is Senior Fellow for National Security Studies at the U.S. Business and Industry Council in Washington, DC. E-mail him at HawkinsUSA@aol.com.

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