U.S. Perspectives on Transatlantic Armaments Cooperation

The Honorable Paul J. Hoeper
United States Deputy Under Secretary of Defense

THE NEW GLOBAL DEFENSE NEEDS

The world order of the past half-century, which we called the Cold War, led both sides to develop superb defense industries--industries with remarkable capabilities and vast capacities. To the relief of all, that balance of terror has ended. But the capacity of global defense industries is now out of balance with the budgets for perceived defense needs.

Two economic consequences occur when capacity exceeds demand: lower prices and lower profits. If excess capacity continues, companies generally take one of two courses: they lay off workers in an attempt to restore profits by lowering costs; or they lower prices in an attempt to stimulate demand from countries that were not previously customers. Companies that take the second route hope to expand their market share enough to restore profit levels. The present excess capacity in the global defense-industrial base is putting governments squarely between the domestic political evil of unemployment and the foreign policy evil of proliferation.

RESTRUCTURING IN THE U.S. DEFENSE INDUSTRY

Four years ago, the U.S. Department of Defense recognized that the U.S. domestic armaments capacity exceeded its demand. Then-Deputy Secretary of Defense Bill Perry got in touch with a dozen defense industry chief executive officers and invited them to dinner at the Pentagon. Dr. Perry told these executives that there were twice as many of them in the room as he expected to see in five years, and that the U.S. government was prepared to stand by and watch defense companies go out of business. This dinner is known around the Pentagon as the "Last Supper."

If the mergers being considered between Boeing and McDonnell Douglas and Hughes and Raytheon go through, 15 of America's top defense companies will have become four: Lockheed Martin, Boeing, Raytheon, and Northrop Grumman. These companies have not simply merged, they have restructured by closing excess facilities and by cutting their work forces.

The 20 or so mergers in the U.S. aerospace and electronics sector during the 1990s have cut 1.8 million jobs from the defense sector. Fortunately, our economy has been robust enough to absorb this job loss. In fact, the United States has created more jobs than it lost during the present decade and our unemployment stands near a post-World War II low.

But I do not want to minimize the pain that some workers have felt. The average skilled assembly worker who is laid off often needs a year to find a new job that pays an average of $19,000 per year less than he or she received before. Our government--and our aerospace companies--care about these workers.

But America's defense industry has had to restructure out of necessity. Our defense budget has fallen dramatically since 1985--both in real terms and as a percentage of GDP. As a percentage of GDP, it is now about 3%. This is the lowest percentage in half a century. And while present world conditions prevail, the defense budget is not likely to grow; at best, it may continue at about 3% of GDP. Because the security interests of the United States cannot be properly maintained if the American people have to pay the costs of excess capacity, we have had to stand by and watch companies leave the defense sector. We simply cannot stay strong militarily and economically by paying more for less.

RESTRUCTURING IN THE EUROPEAN DEFENSE INDUSTRY

Excess capacity in the global arms industry, declining defense budgets, and the rapid restructuring of the U.S. industry have caused Europe, through initiatives proposed by France, to look at ways it too can deal with the changes that have taken place in the defense sector during the last decade. Along with downsizing and privatization initiatives, Europeans have formed organizations to manage cooperative ventures among different countries. The ultimate goal of combining their resources is to become more competitive and focus resources more sharply.

The Development of Organizations to Manage Cooperative Ventures

National Armaments Directors, meeting as the Western European Armaments Group, formed a management organization, the Western European Armaments Agency (WEAO), as a subordinate body of WEU. Its goal is to eventually create a European armaments agency. WEAO will start by coordinating member participation in some 40 ongoing armaments research and development projects and by assuming responsibility for new cooperative projects.

France, Germany, Italy, and the UK have created another organization, the Organization for Joint Cooperation in Armaments (JACO, also known by the French acronym OCCAR). This agency is a follow-on to the French-German Armaments Agency proposed two years ago. JACO's purpose is to increase efficiency and reduce the costs of developing and producing weapons systems for its members; it eventually plans to manage cooperative weapons programs for national procurement agencies. JACO programs will be run by integrated teams and a single director who will be given the requisite authority to impose decisions on national partners.

WEAO and JACO are two examples of the integration process Europe is following in order to more closely coordinate national armaments programs that in turn will allow its armaments industry to remain competitive in the world market. If the Europeans can work out their differences, the long-term result should help lead to a healthy defense industry that is a much more viable competitor and partner for U.S. industries in the worldwide armaments market. To the same end, efforts are continuing to consolidate and rationalize the European defense industries--efforts that must take place both within and across national boundaries.

The Need to Go beyond European-wide Cooperation

I have two cautions regarding this work. First, it is not enough to privatize companies nor to merge them; neither privatizing nor merging automatically eliminates excess capacity. Painful choices about closing excess facilities and rationalizing labor forces must be made. Second, if the formation of WEAO and JACO is accompanied by the imposition of national preference rules, then we are headed in an extremely unproductive direction.

There is also a need to advance industrial cooperation with the nations of the former Warsaw Pact, a step that is now becoming a reality. The Western defense industry has started to invest capital and technology in the Central and Eastern European production capacity because it sees the potential residing in the region's talented and educated work forces.

DEVELOPING INDUSTRIAL PARTNERSHIPS WITH NATO MEMBERS AND FORMER WARSAW PACT COUNTRIES

On the government side, the strengthening of our political relationships with the former Warsaw Pact nations over the past seven years has resulted in new opportunities for all concerned. Industrial partnerships are now forming. We are working hard to improve not only military but also industrial interoperability. In the U.S. we are moving to adopt the use of international commercial standards for our own defense procurements, part of a trend away from unique military standards that will help industries adapt to producing NATO-compatible equipment. We are releasing hundreds of standards that provide the information necessary for manufacturing NATO-standard equipment. We have also invited NATO partners to join the CALS effort so that they can move toward a common and single-use defense armaments data system. And we have opened to full participation by NATO Partner nations several NATO committees that deal with the infrastructure supporting defense acquisition, codification, quality assurance, contracting, and material standards.

As part of this effort, however, the governments of Central Europe must do their share. First and foremost, they must create business climates that promote private investment. Here in the Czech Republic, the government is doing exactly that, as evidenced by the willingness of the Western defense industry to invest in the Czech Republic's only airframe manufacturer, Aero Vodochody.

In addition, Central European nations must put in place a defense procurement system that is open and transparent: a system in which competitors can feel comfortable that if they submit the most cost-effective proposal, they will win any competition. A procurement system that does not measure up to this standard, that does not give companies the confidence that their proposals will be considered on their merits, will not attract first-rate competition.

AVOIDING A "PRISONER'S DILEMMA" SITUATION

If we fail to reduce the world's excess capacity for defense articles, or if we wind up with a U.S. market that is closed to European defense articles and a European market that is closed to U.S. defense articles, we could find ourselves in an economic "prisoner's dilemma"--where rational individuals defect to a position that is irrational for the community as a whole--which could encourage weapons proliferation. For example, a company official might say, "I would never sell this weapons technology to Country X. Except that I know Y will. So, since Country X is going to get the capability anyway, I may as well get the sale ..." All competitors might think this way, and Country X would wind up with the capability in question, even though it might be harmful to the security posture in the region. In fact, the sale might even be made at an unprofitable price for the selling industry. While I am not suggesting that all companies and governments would succumb to the "prisoner's dilemma," powerful economic forces would lead them in this direction.

What can be done to avoid this situation? The only reliable solution is cooperation in the defense armaments field. So how must we proceed? First, as our panel of defense ministers has suggested, nations should begin the armaments cooperation process early--initiating discussions on common military needs before formal requirements are locked in. Plans for armaments cooperation should begin before any country has identified a specific company to perform the work.

Second, we should plan to buy systems in a competitive environment. We should buy from competing teams that include industrial participants from each partner country, and not force one nation's industry to compete against another's. In this way we can realize the benefits of competition without creating the political unease that results from competitions in which some participants might not receive an equitable work share. We can encourage competition between companies instead of between parliaments.

The U.S. and our European partners are using this model of competition in the Medium Extended Air Defense System (MEADS). We hope to do the same in the production phase of the Multifunctional Information Distribution System (MIDS) program. We would also like to use competing teams throughout the production phase of any cooperative program, using a 'leader-follower" scheme. By creating a true partnership among the nations acquiring a system, we would be able to produce and obtain interoperable equipment that incorporates the cooperating nations' best technologies and capabilities in a way that maximizes economic value and minimizes the threat of proliferation.

THE NEED FOR TRANSATLANTIC COOPERATION

The end of the Cold War should not--and need not--signal the beginning of a trade war in defense armaments. With cooperation we should be able to secure the benefits of military interoperability as well as the benefits of the world's best technologies. But these benefits can be achieved only if cooperation is transatlantic. We in the United States believe that this cooperative approach is the optimum way for all NATO members to meet the needs of our forces in the 21st century. We have already set our course this way, and, judging by the favorable reaction in a recent edition of The Economist, we are headed in the right direction. With your help we will continue down this road to a new era in defense armaments cooperation.