Arming Our Allies: Cooperation and

Competition in Defense Technology

May 1990

OTA-ISC-449

NTIS order #PB90-254160
Recommended Citation:

U.S. Congress, Office of Technology Assessment, Arming Our Allies: Cooperation and

Competition in Defense Technology OTA-ISC-449 (Washington, DC: U.S. Government

Printing Office, May 1990).

For sale by the Superintendent of Documents

U.S. Government Printing Office, Washington, DC 20402-9325

(order form can be found in the back of this report)
Foreword

Cooperating with our allies in the supply and joint production of defense technology has

been an important element of U.S. national security policy and a cornerstone in alliance

relations for the past 40 years. As the undisputed technological leader of the Free World in the

post-WWII period, the United States transferred military technology to its allies in Europe,

Asia, and the Middle East to help them rebuild their industries and defend against the military

threat from the Soviet Union and its allies.

The success of this decades old policy has led to many economic and political changes.

Consequently, Congress and the Administration are re-evaluating the nature of the military

threat in light of the failure of communism in Eastern Europe, deepening detente in

U.S.-Soviet relations, decreasing defense budgets, and escalating competition with our allies

in both military and commercial technologies.

This review comes at a time when the United States has lost its monopoly advantage in

the development and production of sophisticated defense systems. Three centers of rough

technological and economic parity now dominate the globe—the United States, the European

Community, and Japan. As a result, overcapacity and real competition for shrinking defense

markets among the different national and regional defense industries has become evident.

At the request of the Senate Committee on Armed Services and the House Committee on

Government Operations, OTA undertook an assessment of international collaboration in

defense technology. This Special Report is the frost product of that assessment. It provides an

overview of the subject and analyzes the impact that changes in the environment of defense

technology and reduced East-West tensions will exert on defense industrial cooperation and

associated alliance relations.

U Director

,..

Ill
International Collaboration in Defense Technology

Advisory Panel

John S. Toll, Chairman

President

Universities Research Association, Inc.

David M. Abshire

President

Center for Strategic and International Studies

Morton Bahr

President

Communications Workers of America

Michael Bonsignore

President

Honeywell International

Robert B. Costello

Senior Fellow

Hudson Institute

Jacques S. Gansler

Senior Vice President

The Analytic Sciences Corp.

Everett D. Greinke

Consultant

Ryusuke Hasegawa

Director of Far East Affairs

Allied Signal Corp.

Robert J. Herman

Vice President

United Technologies Corp.

Robert D. Hormats

Vice Chairman

Goldman Sachs International

Francine Lamoriello

Manager of International Trade

KPMG Peat Marwick Co.

Robert G. Lunn

Vice President

Science Applications International Corp.

Andrew Pierre

Senior Associate

Carnegie Endowment for International Peace

Raymond C. Preston

Vice President Washington Operations

Williams International

Clyde V. Prestowitz

President

Economic Strategy Institute

John D. Rittenhouse

Senior Vice President

General Electric Aerospace

Richard Samuels

Professor

Department of Political Science

Massachusetts Institute of Technology

James A. Tegnelia

Vice President

Martin Marietta Electronics

Richard E. Tierney

President

SLI Avionic Systems

Raymond Vernon

Professor

J.F. Kennedy School of Government

Harvard University

Dale S. Warren

Vice President & Deputy General Manager

Douglas Aircraft co.

NOTE: OTA appreciates and is grateful for the valuable assistance and thoughtful critiques provided by the advisory panel members. The panel does

not, however, necessarily approve, disapprove, or endorse this report. OTA assumes full responsibility for the report and the accuracy of its

contents.

iv
. .

International Collaboration in Defense Technology

OTA Project Staff

Lionel S. Johns, Assistant Director, OTA

Energy, Materials, and International Security Division

Alan Shaw, International Security and Commerce Program Manager

William W. Keller, Project Director

Gordon Law

Todd M. La Porte

Peter H. Rose*

Congressional Research Service Contributors

Larry A. Niksch

John Moteff

Administrative Staff

Jackie Robinson

Louise Staley

Donna Reynolds

Contractors

P. Robert Calaway

Michael W. Chinworth**

Allen Greenberg

*AAA.S Fellow, 1989-90.

**~T~Wm Science and TeChnOlOgy ~o~~.
Workshop on Transatlantic Cooperation in Defense Technology—

European Perspectives

Alan Shaw, Chair

Program Manager, International Security and Commerce Program

Office of Technology Assessment

Peter A. S. Boxer

Senior Vice President

British Aerospace

Richard Brackeen

CEO and President

Matra Aerospace, Inc.

David C. Elliott

Vice President

Plessey Electronic Systems, Inc.

William Heinz

Vice President

Dowty Electronic Systems Division

B. P. (Paul) van Ysselstein

Vice President Defense Affairs

Fokker Aircraft USA, Inc.

Mario Locatelli

President

FIAT, Washington, Inc.

Barry New

Vice President-Government Programs

Rolls Royce

Peter H. Orvis

Special Assistant to the President

Hollandse Signaalapparaten B.V.

Enrico Striano

President and CEO

Agusta Aerospace Co.

Manfred von Nordheim

President

MBB of America, Inc.

NOTE: OTA appreciates and is grateful for the valuable assistance and thoughtful critiques provided by the participants in the workshop. The workshop

participants do not, however, necessarily approve, disapprove, or endorse this report. OTA assumes full responsibility for the report and the

accuracy of its contents.

vi
CONTENTS

Page

Overview and Principal Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Chapter I: Interdependence in Defense Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Chapter 2: Implications and Issues for Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Chapter 3: European Policies in Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

Chapter 4: Emergence of Transpacific Collaboration: The Case of Japan . . . . . . . . . . . . . . . . . . . . 61

Chapter 5: Commercial Implications of International Collaboration . . . . . . . . . . . . . . . . . . . . . . . . . 77

Appendix A: Organizational Structures for Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89

Appendix B: Techniques and Mechanisms for Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96

Appendix C: Japanese Defense Policymaking and Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102

Appendix D: South Korea: Goals and Strategy for Building Defense Industries . . . . . . . . . . . . 111

vii
.

,

Overview and Principal Findings

.
Overview and Principal Findings

The established order of the Cold War period

is being rapidly supplanted by new security and

economic relations. There is much uncertainty

regarding the future of NATO and the Warsaw

Treaty Organization, the evolving political systems of Eastern Europe, internal political and

nationalist struggles in the Soviet Union, German reunification, economic integration of Western Europe, and future superpower relations.

What is certain is that the reasons the United

States collaborated with its allies in defense

technology are not as valid as they once were,

and U.S. policies on armaments cooperation,

broadly conceived, must be reconsidered.

The principal reason the United States transferred military technology to its allies, both in

Europe and in Asia, was to build up their defense

industries and military capacity for mutual defense against the Soviet Union and other communist powers. That policy succeeded. In the

space of a few decades it contributed to the

development of sophisticated centers of defense

technology across Western Europe and in the

Western Pacific. The policy also led to significant peacetime overcapacity in the defense

industries worldwide, and to intense international competition for sales of high-technology weapons.

Superiority in military technology over potential adversaries has been the explicit foundation of U.S. national security policy for 40 years.

Technological leadership over our allies has

been implicit in that policy. That superiority is

declining, in part because of our own efforts to

assist our allies. The loss of technological

supremacy may bean unavoidable long-term

cost of maintaining strong security alliances.

It might also be the price of gaining access to

foreign defense technology in the future.

Cooperation in defense technology is accelerating this process, and helping to undermine the

U.S. national security posture of designing and

fielding defense systems at least a generation

ahead of the competition. However, the changing nature of the military threat makes this

an appropriate time to reevaluate our basic

national security strategies and goals. Because the threat is changing, the character of our

alliances is likely to change as well.

If tensions associated with trade and technology competition between the United States and

Japan continue to escalate, the traditional

separation between economic affairs and the

U.S.-Japan security relationship probably

cannot be maintained. This became evident in

the controversy over the transfer of F-16 fighter

technology to assist Japan in building its new

fighter aircraft, the FSX. For the first time,

military and trade issues were intertwined in an

open, and sometimes acrimonious, public debate. It became clear in the course of this debate

that the U.S. Government lacks a coordinated

policy or institutional mechanism by which to

address specific cases like the FSX, or to resolve

general questions arising from armaments collaboration with its allies. The issue remains

unresolved, and it is probable that the FSX

controversy will be revisited the next time a

major codevelopment program is proposed

with an ally.

In Europe, maintaining cohesion within the

NATO Alliance has always been a balancing

act, even in the face of a common threat from the

East. Achieving rationalization, standardization, and interoperability of Allied weapons has

proved to be an elusive goal. Armaments

cooperation among the NATO Allies should

have political benefits as well, but as the Nunn

amendment programs have demonstrated, involving many governments in codevelopment

lowers the odds of a successful outcome. 1 As the

perception of the Soviet threat to Western

l~e Num.Ro~.wmer ~en~ent t. tie w 198(5 Defense Au~ofition kt autioriz~ tiding for NATO cooperative R&D pfOgl%lIIM, and has

received an appropriation each fiscal year as follows: W86, $100 mi~om ~87, $145 millioT ~88t $150 millio% and ~~>$117 ~llion. me re~~

have been uneven, however, due to the diffkulty in harmonizing military requirements and to the multiplication of regulation and administration.

–3–
Europe diminishes, perhaps in consort with

real conventional force (CFE) reductions

now being negotiated in Vienna, the military,

economic, and political interests of the United

States and its European NATO Allies may

diverge significantly.2

Such divergence will be exacerbated by

increased competition between the U.S. and

European defense industries for shrinking defense funding. U.S. defense exporters look to

European markets as a safety valve against

anticipated steep declines in the U.S. defense

budget, and European firms seek to penetrate the

U.S. defense market, which is still by far the

largest and most lucrative in the world. International collaboration among defense companies appears to be increasing at a time when

transatlantic intergovernmental cooperation

in defense technology has become increasingly problematic. Interdependence for the best

defense technology is fast becoming a fact of

life.

Concurrently, competition between U.S. and

European defense companies will escalate as

they seek to export sophisticated weaponry to

maintain revenues and keep production facilities

open in a declining market. As U.S. influence

over European sales to the Third World decreases, differences in the political and economic interests of the United States and its

NATO Allies will become more important. It is

possible, for example, that the United States

will need to project power into regions and

against countries that have been armed by

the Europeans.3 In that case, the United States

will have to design its weapons systems against

European standards, and the question of what

defense technology is transferred to Europe will

become crucial.4

But here, as elsewhere, the interests of the

United States and its defense companies may

differ in important respects. Large U.S. companies that can operate internationally are entering

into strategic market alliances and other business arrangements with European and Asian

firms, transferring U.S. technology and subcontracting with them for portions of U.S. weapons

systems. Although defense collaboration makes

business sense for individual companies, it

may ultimately create unacceptable dependence on foreign suppliers, erode parts of the

U.S. defense industrial base, and undermine

U.S. foreign policy goals such as nonproliferation of delivery vehicles for weapons

of mass destructions

To complicate matters, even though it does

create interdependence, international collaboration also gives DoD access to foreign

defense technology that may be superior to

that produced in the United States. Extensive

procurement from foreign suppliers, however,

coupled with a failure to support U.S. sources,

could damage domestic defense companies. But

a policy that guaranteed domestic sourcing from

particular companies (or for a specific technology) might, in time, degrade domestic capability

because there would be no foreign competition

and, therefore, less incentive to innovate and to

make investments in R&D.

As defense industries restructure their operations in response to overcapacity and declining

defense budgets, there will be a few winners and

many losers. The United States could end up

with a defense industrial structure inadequate for the defense of the Nation. It is also

possible that the United States will not need

anything approaching the level of defense industrial capacity that it has built up over the past

~economic integration in Europe pmcexls smoothly, even in the event of accelerated German reunifkatioq increasing trade competition between

the Europeans and the United States may introduce additional complexities into the NATO equatiom

3~y~v-EmPWW~nS ~tCIIIS have incorporated technologies initially developed or codeveloped by U.S. defense companies.

4~.s prob]em Wm demons~ted in tie pe~~ @Jf when the U.S.S. Stark WtI.S s~ck by two French-me fio~t missil~.

5“At least 16 Third World mtions now possess ballistic missiles. . . The United States has not transferred ballistic missiles to the l%ird World since

1974. The most recent md important source of missile technology for Third World missile programs is West European companies and individuals willing

to sell technical and material assistance.” U.S. Arms Control and Disarmament Agency, World Military Expeti”tures and Arm.r Transfers 1988, June

1989, p. 17.
Overview and Principal Findings ● 5

three decades. The challenge will be to convert

the defense industries to an appropriate

peacetime posture and still retain the capacity to mobilize in a crisis.

Any proposed policy changes on international

collaboration will have to be sensitive to the different kinds of companies that supply equipment to the Department of Defense. Large prime

contractor companies that build and integrate

whole systems generally see increased internationalization as a positive business trend. Some

argue that international corporate alliances create access to new markets and superior technology, and will ultimately produce greater efficiencies by driving less competitive suppliers

out of business. Smaller subcontracting companies that depend on DoD for most of their

business worry about losing sales to foreign

competition and about resulting damage to the

U.S. defense industrial base. International dualuse technology producers may decide not to do

business with the Defense Department if the

rules and regulations are sufficiently onerous.

This OTA Special Report identifies and analyzes the principal issues related to international

collaboration in defense technology, and provides some policy discussion. As an interim

report, it does not include detailed policy

options for congressional consideration; these

will be included in the final report of the project

in May 1991. Additional findings on defense

industry and technology are presented at the

end of chapter 1, and the principal issues are

discussed at the end of chapter 2. Chapters 3-5

and appendices A-D provide background and

analysis on which the findings are based.
—

Chapter 1

Interdependence in

Defense Technology
CONTENTS

THE CONTEXT OF COLLABORATION . *.*.*.************************************ 9

HISTORICAL PERSPECTIVE *e. .**. o.. ... ..** o*, *e** *o. .*** ***o *0. .*o**e. oo **c. *

ADDITIONAL FINDINGS-Defense Industry and Technology . . . . . . . . . . . . . . . . . . . . . .

united states **. **o* *.. ..*. *.. .*. *.** *.. **. .0. ... .*. .=

. *.*o*. **. .*. o*O*. **e**.*

Western

western

Europe *.. *.** .**. **. ***. ***0 *.** .**. . ********m**********.***..*******

Pacific ... *.. .**. .**O. ... **. .*a. s*o**** ***o *00* *o*o. *o*o. *.. c*********+*

13

15

15

16

17

Department

1-1. Forms of Collaboration in

Page

Authority, 1946-95-Estimated . . . . . . . . . . . . . . . . . . . . 11
Chapter 1

Interdependence in Defense Technology

THE CONTEXT OF

COLLABORATION

In the spring of 1989, Congress decided to

permit General Dynamics Corp. to transfer F-16

fighter aircraft technology to Japan as part of an

agreement with Mitsubishi Heavy Industries

(MHI) to build an advanced fighter, the FSX.

This deal differed from previous military cooperation that transferred defense technology to

Japan because—for the first time—it involved

joint development and production of a largescale weapons system, funded by the Japanese

Government, and using a Japanese company as

the prime contractor. 1 It is also different because

it took place against a backdrop of trade and

technology issues that continue to strain relations between the two economic superpowers.

The debate over the FSX divided the Bush

Administration, with the Department of Defense

(DoD) defending the deal against critics in

Congress, the press, and the Department of

Commerce. Commerce officials and others asserted that advanced technology transferred to

Japan would ultimately be used to penetrate

civilian aviation markets, posing a new competitive threat to the American aviation industry.

They questioned whether the FSX agreement

was in the national interest, and specifically

what technologies or other benefits the United

States would receive in return. Others observed

that in recent years, at the urging of the U.S.

Government, the Japanese defense budget has

risen to over $30 billion, making it roughly

equal to those of the major European powers: the

United Kingdom, West Germany, France, and

Italy. 2 They also expressed concern that the

approval to build the FSX might constitute a

step toward the remilitarization of Japan.

The prospect of U.S.-Japanese collaboration

on the FSX also caused dissension within

Congress, between factions that emphasized

cooperation with our allies on one side, and

those that sought to protect the defense industrial base and the commercial aerospace industry

on the other. The debate made international

collaboration with Japan a major issue in

Congress and subjected it to national media

attention. The question of how much and what

kinds of technology the United States should

transfer—and to which allies—became politically charged.

In the absence of a comprehensive policy, it

is likely that the controversy over the FSX will

be revisited the next time DoD negotiates a

major codevelopment project with Japan. Security and trade issues, which had long occupied

independent zones, have collided and will now

have to be considered within a single policy

framework. The argument that the United States

should transfer technology to increase Japan’s

military capability and to strengthen ties between the two nations has lost its force. It is

likely that trade and security issues will be more

tightly coupled in the future, and that continued

success of the U.S.-Japan security relationship

will depend increasing y on the ability of the two

nations to reduce economic confrontation and

resolve outstanding trade disputes.

But Japan is not the only point of friction.

Even before the FSX debate, the issue of

collaboration with our NATO Allies had become more salient. With U.S. encouragement,

the Europeans have developed very effective

intra-European defense cooperation and, for

many years, have configured their policies and

defense industries to support it. There is considerable speculation that the Independent Eurol~e Ufited s~te~ ~d ~revio~ly ~~~ed nm~ous milit~ syst~s to he Japanese, such as the P-3C anti-submarine aircraft th F-15 fight~,

and the Patriot missile system, but these systems were developed in the United States, and then licensed for production in Japan and in other allied mtions.

2Japanese ~liW spn~g is tec~olo= ~temlve. IL-I 1$)87, for example, Japan’s defense budget WaS the SiXh kugest in he world, but JaPaII did

not rank in the top 20 in terms of number of persons in its militq services. U.S. Arms Control and Dis armament Agency, World Military E~enditures,

#131 (Washington, DC: U.S. Government Printing Officx, June 1989), p. 3.

–9–
pean Programme Group, an organization of

European defense ministers, will assume the

role of negotiating defense collaboration with

the United States on behalf of a united Europe.

Collaboration in defense technology is a

major issue in the context of restructuring the

defense industries in the United States, Europe,

and Asia to meet future threats with far smaller

defense budgets.3 The nature of the threat, the

forces necessary to meet it, and the levels of

defense funding are all uncertain. In these

circumstances, it will be very difficult, both

politically and economically, to retain the same

defense industrial capacity (in the United States

and in the NATO Alliance) that has been built

up over the past four decades.

In the post-WWII period, the U.S. defense

budget has averaged about $270 billion a year in

constant fiscal 1991 dollars. It has dipped as low

as $210 billion, following the Korean and

Vietnam conflicts, thus establishing what might

be termed a Cold War floor for defense expenditures (see figure l-l).

The Reagan spend-up represented by far the

largest peacetime budget increase in U.S. history. Many defense industry executives and

analysts believe that the U.S. defense budget is

now entering a period of free fall, similar to the

post-Vietnam era of detente, with the difference

that the Cold War has ended, and the perception

of the Soviet threat in the public and among

politicians is greatly reduced.

Much lower defense budgets will cause major

changes and pains of adjustment for the defense

industries around the world, particularly if such

constraints are sustained into the foreseeable

future. A comprehensive policy on international

collaboration will bean integral part of deciding

how to restructure the defense industries. A

sound policy would tell us how much defense

industrial capacity to retain at home, how much

to build in collaboration with our allies, how to

allocate the burden of defense among the allied

nations, and how to restructure the defense

industries to do it.

Powerful factions within Congress have long

expressed concern about the U.S. defense industries, particularly the second and lower tier

defense contractors. Numerous statutes contain

buy-American provisions, and an amendment to

the Defense Production Act, proposed during

the 101st Congress, would direct the President

to limit within 5 years the production of existing

and new weapons systems to domestic manufacturing and assembly sources. However, Congress continues to grant the Secretary of Defense

authority to waive the Buy American Act, and

has funded dozens of programs to stimulate

R&D and possible codevelopment of new weapons with the NATO Allies under the Nunn

amendment. 4 Indeed, there is a long history of

collaboration between the United States and its

European Allies, including coproduction of the

F-16 fighter airplane by four nations, and the

NATO AWACS, to name two prominent examples.

Few disinterested observers take the position

that the United States can still develop, effectively and efficiently, all of the technology

needed to build modern weapons systems; that

period of weapons self-sufficiency was over

even before the war in Vietnam. Much weapons

technology is dual-use, that is, produced both

for civilian markets and for military applications. Much of it is developed by large multinational companies with manufacturing facilities

around the world. Part of the problem is our need

to accept the fact that the leading edge of

3~e s~c~e of tie U.S. defense industries is an.tdyzed in the fOllOw@? Cqta.

4~e Nm.Ro~.wwner ~en~ent t. me fMc~ y- 1986 D~e~e Au~ofi~tion Act pmduc~ a budgetary commitment to NATO ~~ts

cooperation for the first time, with $100 million appropriated exclusively for NATO cooperative military R&D in f~cal year 1986, and an additional

$25 million appropriated for side-by-side testing of U.S. and Allied systems.
Chapter 1--Interdependence in Defense Technology ● 11

Figure l-l—Defense Department Budget Authority. 1946-95—Estimated

450

1

400.

350-

300-

250.

$bllllons

200-

150-

100,

(in 1991 constant $ billions)

DoD estimated

2% reduction

40/o reduction

6% reduction

\. I

Cold War floor \ 8% reduction

10% reduction

I J

04, , . , , , , , , , i

1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995

Year

SOURCE: Department of Defense, and Office of Management and Budget, 1990.

technology does not always reside in the defense

industries or even in the United States.5

Increasingly, internationalized patterns of

industrial development are making irrelevant

much of the debate over U.S. defense production. If DoD pursued a strict policy of procuring

only from U.S. companies, it would be difficult

to specify exactly what a U.S. company is.

Would it be possible to find them in sufficient

quantity and quality in the United States to

sustain the defense industrial base?6 Would a

foreign-owned company be considered nonU.S. for defense purposes, even if it conducted

most of its R&D, manufacturing, and sales

activity in the United States? A great deal of

technology already flows into U.S. defense

systems from Canada, which in addition to

being a member of NATO, is part of the North

American Defense Industrial Base, and is tightly

integrated with the U.S. economy through free

trade agreements. 7 Many U.S. weapons systems

depend, partly by design and partly by chance,

on Japanese and European technology, parts,

and components. Interdependence in the defense

industries is a fact of life and will continue to be

in the 1990s and beyond.

Concurrently, the trend toward multilateral

collaboration in defense technology has created

what one analyst calls ‘‘class warfare’ between

the largest U.S. prime contractors and the

thousands of smaller defense companies that

depend on subcontracts from the primes to stay

in business. The large aerospace and electronics

defense companies, among others, favor policies that promote international collaboration,

because it gives them the flexibility to team,

subcontract, and form alliances with suppliers

and partners around the world. This proliferates

the number of different kinds of production

arrangements that can be made, but more

importantly, it increases access to foreign defense markets for the U.S. primes.

5s=, for ~~ple, Defense Science BO~4 ‘‘Report of the Defense Science Board Task Force on Defense Semiconductor Dependency,’ prepared

for the OffIce of the Under Secretary of Defense for Acquisitio~ Washingto~ DC, February 1987; U.S. Congress, Office of Technology Assessment

Paying the Bill: Manufacturing andAmerica’s Trade Deficit, OTA-I’IZ-390 (Washington DC: U.S. Government Printing OffIce, June 1988); and U.S.

Congress, Office of Technology Assessment Making Things Befter: Competing in Mam.tfacruring, O’IA-ITE-443 (Washington DC: U.S. Governrmmt

Printing Office, February 1990).

60TA ~&jKSs~ ~ese ~d re~ted iSSueS ~ U.S. Congtis, Offla of T~~ology Assessmen~ ~~~~ing the Edge: Maintaining the Defense

Technology Base, OTA-ISC-420 (Washington, DC. U.S. Guvcrnment Printing Offke, April 1989).

7cm& is ~o~id~~ pm of tie US defeme ~dus~~ bme for ~1 but a few ~g~y cl~sfl~ DoD prOgrZUIM. ~cooperation dates tick to the

1940s, and has recently been reaffmed by both nations.
12 ● Arming Our Allies: Cooperation and Competition in Defense Technology

Most of the smaller American defense companies are more parochial in their concerns. They

specialize in doing defense business in the

United States, and generally do not have the

requisite knowledge or resources to enter into

international business arrangements. These companies fear loss of business when a large U.S.

company agrees to let a foreign firm build a

major subsystem or component for a U.S.

weapon system, because the foreign firm is

unlikely to do business with suppliers in the

United States. In this view, if a subcontract is

awarded to a European or Asian firm, it is a

zero-sum game, a lost opportunity for a U.S.

company that may be extremely damaging to

that company’s future. They argue, moreover,

that giving defense business to foreign firms

erodes the U.S. mobilization base.

Consequently, many smaller defense companies support legislation that would force DoD to

spend defense dollars at home. They argue that

industrial policies of other nations strengthen

the hand of foreign competitors, creating unfair

advantages through subsidies, tax incentives,

and low-interest loans. Nevertheless, the interests of the smaller companies may not be

promoted by protection from the forces of

globalization. In the FSX example, Japan agreed

to let General Dynamics (GD) do 40 percent of

development of the new airplane, and some

unspecified amount of production, even though

the U.S. Government does not plan to buy it.8

GD is an obvious winner in the short term, but

so are its U.S. subcontractors who will supply

parts and components for the FSX fighters it

produces. In this situation, GD acts as a conduit

through which foreign work and money flows

down into the U.S. defense industrial base.9

In the 1990s, some international collaboration

in defense technology will be unavoidable and

probably desirable. Ultimately, Congress will

have to decide how much interdependence in

defense technology and industry is prudent and

supportable; which allies should be favored and

to what extent; what the United States should

expect or demand in return for its technology;

how best to support domestic development of

critical technologies; and what kind of domestic

defense industrial structure must be maintained

to meet the future security needs of the United

States. having such decisions to DoD, to the

defense industry, to chance, or to the vagaries of

international defense markets could place the

Nation’s security at risk with catastrophic consequences. Moreover, congressional approaches

that place constituency interests ahead of the

national interest are potentially dangerous, as

the Nation confronts dynamic new relationships

in economic, political, and strategic security

around the world.

Whatever the final policy determinations are,

they will be taken against the backdrop of

astonishing political upheaval in Eastern Europe

and changes in the relationship between the

United States and the Soviet Union. But sensational headlines about the end of the Cold War,

the reunification of Germany, and the irrelevance of the NATO Alliance must not obstruct

a reasoned analysis of significant trends that are

already exerting pressure on the structure of

military cooperation in the West. These include:

●

●

●

●

●

●

increasing capacity and parity in the development and production of advanced weapons

systems throughout Western Europe and

the Western Pacific;

overcapacity in many sectors of global

defense industries;

economic integration of Western Europe

pursuant to the Single Europe Act;

consolidation and contraction of the defense industries, both in Europe and in the

United States;

globalization of the defense industrial base;

and

decline in defense budgets.

sIt is highly unlikely that any NATO country would permit a U.S. company to codevelop and produce a major weapons SJfSteIU even onemon

U.S. technology, if the U.S. Government did not share in the development and proCuremcllt costs.

9@Mr~ _cS u- ws CucW@m to political advantage during the FSX debate, asking its potential subcontractors to write members of

Congress in support of the FSX deal.
Chapter 1--Interdependence in Defense Technology ● 13

These factors are already creating significant

adjustment in the U.S. defense industries and in

the structure of international collaboration; adjustments that will be accelerated by events in

Eastern Europe.

HISTORICAL PERSPECTIVE

In the first two decades following the Second

World War collaboration in defense technology

meant that NATO Allies bought defense equipment from the United States. As a consequence,

nearly all NATO military technology and equipment initially incorporated U.S. specifications

and standards. But the period of U.S. domination of these weapons markets and technology

ended in the early 1960s, when the United

Kingdom began to develop its first military

airplanes of the post World War II period, and

the French followed suit with domestically

developed tanks and aircraft.

In the Western Pacific, cooperative defense

programs have been an important element of

U.S.-Japanese relations since 1954, when the

Mutual Defense Assistance Agreement established the legal basis for the United States to

supply Japan with military equipment and

technology. Similarly, South Korea has purchased and continues to buy large amounts of

U.S. military equipment since the end of the

Korean War. Other forms of collaboration

emerged with South Korea in the 1970s with the

transfer of technical data packages to Korean

defense firms, and in the 1980s, with licensing

and coproduction of U.S. military systems such

as the M109 howitzer and the F-5E fighter.

Intra-European codevelopment of weapons

systems, particularly in aerospace programs,

began in earnest in the middle to late 1960s. In

1965, France and the United Kingdom created a

joint company, Sepecat, to build the Jaguar. In

1968, the United Kingdom, West Germany, and

Italy established two new international concerns, Panavia (for aircraft) and Turbo-Union

(for engines) to build the Tornado, an advanced

fighter for its time. In 1969, France and West

Germany joined together to develop the Alpha

jet. These early efforts at collaboration enabled

the European powers to pool their defense

industrial and financial resources, and to lessen

their dependence on the United States for

defense equipment.

10 They set the stage for the

creation of a European armaments industry that

by the 1980s produced military technology to

rival that of the United States in many fields.

By the late 1970s, and with the support of

Congress, most European countries had negotiated bilateral agreements, or memoranda of

understanding (MOUs), with the United States

that reduced trade barriers, specifically, waiving

relevant buy-American statutes and regulations.

By conservative estimates, in 1977 the trade

imbalance in military equipment between the

United States and Europe was 8 to 1 in favor of

the United States. A decade later, that margin

had decreased to less than 2 to 1. Beyond these

direct, measurable sales, the United States

depends on foreign defense companies for a

large but unspecified number of parts and

components, including communications systems, chemical defense equipment, and other

items that employ a wide range of advanced

technologies.

European nations are increasingly reluctant to

buy military equipment from the United States,

or even to build systems that were initially

designed and developed here.ll Instead, our

NATO Allies seek to enter into codevelopment

projects, with each nation funding a share of the

costs of the system. Such relationships are

common among the European nations, where

the escalating costs of modern weapons systems

long ago outpaced the ability and political will

of most single countries to afford them. Insistence on developing part of a system also

reflects the desire of the participating nations

and companies to increase domestic defense

l% ~mwss of indigenization of defense capacity will be discussed in the chapter 2.

11~ is due ~ pm t. ~e~ ~~rtit in~~~genous defense ind~ti~ capacity, mdpdy to U.S. twboIogy hiid~d Security restrictions.

The issue of U.S. unilateral export controls on military technology is addressed at the end of chapter 2.
industrial capacity, and at the same time, to

position themselves to take advantage of commercial applications of new and evolving technologies. Many European defense companies

also develop products for civilian hightechnology markets.

Collaboration in the development and production of military technology and systems is an

extremely complex enterprise, and it takes many

different forms. Among governments, it includes information exchange, coproduction, codevelopment, security assistance, direct commercial sales, and other mechanisms. Some arrangements are open-ended, with virtually no commitments other than to talk. Others result in

major financial investments and the transfer of

critical know-how among nations. Pursuant to

the 1986 Nunn amendment, the United States

has entered into approximately 25 agreements to

fund the initial R&D for new weapons systems

jointly with one or more of its NATO Allies.

These programs initially held great promise, and

were seen as important in the context of

strengthening NATO, both militarily and politically.

Although they constitute the principal means

for DoD to encourage codevelopment with the

European Allies, the Nunn amendment programs have encountered many difficulties and

stumbling blocks. Several key programs will not

go forward, including the NATO Frigate Replacement (NFR90), NATO Anti-Air Warfare

System (NAAWS), Autonomous Precision Guided

Munitions (APGM), and the Modular Stand Off

Weapon (MSOW); and in others, such as the

NATO Identification System (NIS) and MultiFunctional Information Distribution System (MIDS),

one or more of the Allies has pulled out. While

each failed attempt is a separate story, harmonizing military requirements among nations

with different geographical and strategic concerns appears to be extremely difficult. This

problem is likely to grow as the perception of the

common Soviet threat to Europe declines.

Other factors, notably, the administrative

complexities associated with meeting the regulations and requirements of two or more nations,

have also created hurdles for the Nunn programs. When one nation pulls out, there is

usually a domino effect, leading to abandonment of the program. In addition, there are

indications that the U.S. military Services initially viewed the Nunn funding as an extra pot

of money to be applied to projects that were of

low priority to U.S. war-fighting capabilities.12

Some industry analysts argue that, even if the

surviving programs do make it past the development phase, there will not be sufficient funding

in Europe or in the United States to go into

production of low-priority systems. As the Nunn

amendment programs have demonstrated, transatlantic government-to-government collaboration is a fragile process; and few programs have

been successfully completed to date.

At the same time, direct collaboration between U.S. and foreign defense firms appears to

be escalating. U.S. defense companies have

entered into many different kinds of collaboration with their counterparts in other countries.

These arrangements can take the form of direct

subcontracting, joint ventures, teaming agreements, consortia, licensed production, offset

agreements, data and personnel exchange, and

many other financial and business interactions.

Table 1-1 summarizes the different forms of

collaboration.

The remainder of this chapter presents additional findings of this OTA Special Report.

These findings are based on a review of the

literature, interviews by OTA staff, and comments by outside experts. Chapter 2 expands on

the findings and discusses the major issues

related to international armaments cooperation.

Chapters 3 to 5 and appendixes A through D

contain the background material and analysis on

which the findings are based.

12~e ~xwptiom, SU~h ~ N~WS, MMand the Stiace Ship “r’o@o Defense prom, tend to prove the rule. But even here, the importance

of the programs has not been sufficient to overcome the difllculties associated with government-to-government transatlantic collaboration.
Chapter 1--Interdependence in Defense Technology ● 15

Table l-l—Forms of Collaboration in

Defense Technologies

Data and scientist/

engineer exchanges . . . . . Technology transfer through

individuals.

Sourcing . . . . . . . . . . . . . . . . . Direct purchase of a foreign-made

part for a U.S. weapon system.

Subcontracting . . . . . . . . . . . . U.S. prime contractor contracts

with a foreign company to develop

or produce a portion of a U.S.

system.

Licensing ., . . . . . . . . . . . . . . Selling or buying the rights to

produce another firm’s product.

Foreign Military

Sales (FMS) . . . . . . . . . . . Government safes of U.S.

hardware abroad.

Coproduction assembly. . . . . FMS with shared production and/

or assembly.

Codevelopment ... , . . . . . . . Joint design, engineering and/or

production.

Teaming . . . . . . . . . . . . . . . . . Collaboration on a specific

program as prime or subprime

(also multiprogram teaming).

Alliances . . . . . . . . . . . . . . . . . Loose agreements to collaborate

in specific areas of technology.

Joint venture . . . . . . . . . . . . . .A jointly owned corporate entity to

pursue a particular program or

class of programs.

Consortium . . . . . . . . . . . . . . . Loose agreement of several

partners to pursue a technology

area from shared resources with

shared revenues.

Revenue sharing . . . . . . . . . . Joint activity where each partner

invests in his area with agreement

to share benefits/profits.

Acquisitions . . . . . . . . . . . . . . Outright purchase of a firm, either

abroad or domestically.

“Family of Weapons” . . . . . . Agreement to minimize

overlapping weapons

development by cooperating, used

by NATO.

SOURCE: Office of Technology Assessment, 1990.

ADDITIONAL FINDINGS—

Defense Industry and Technology

The principal findings of this Special Report

are presented at the front in the section entitled

Overview and Principal Findings. What follows

are additional findings related to defense industry and technology in the United States, Western

Europe, and the Western Pacific.

United States

Industry-to-industry or direct cooperation between U.S. and foreign defense companies is

increasing dramatically. It has long been the

preferred means of international arms collaboration, and can take almost as many forms as

there are entrepreneurs willing to participate.

The major incentive is economic. Industry

seeks access to foreign markets, and deals

will be structured so that participating companies make money and/or receive technical

leverage, irrespective of national origins and

loyalties. Industry-to-industry cooperation allows companies to make arrangements that

are profitable and make sense for the corporate participants, but the national interest may

not be fully factored into the economic

equation.

Overcapacity of the defense industries is

increasing on a global scale. Major U.S.

defense producers expect worldwide military

funding to decrease over the next several

years, and then to stabilize at much lower

levels. This will cause intense competition,

contraction, and restructuring in the U.S. and

Allied armaments industries. Large U.S. companies are already rationalizing operations,

laying off workers, seeking new markets, and

forming strategic international alliances to

weather the storm. U.S. subtier contractors,

who do not have these options, are likely to

call for protective legislation, and many will

leave defense work or go out of business.

The United States can no longer expect most

of its European Allies and Japan to buy or

even coproduce major weapons systems that

were originally designed and developed in the

United States. Allies increasingly insist that

collaboration take the form of cooperative

development to enhance their domestic technology bases. They are especially interested

in technologies that have significant civilian

applications. Unlike many major U.S. defense companies, the European and Japanese

counterparts have active interests in dual-use

technology, stemming from their commitments to producing and selling in consumer

markets.

Large multinational Japanese and European

companies that produce military systems may

be able to withstand future defense budget
16 ● Arming Our Allies: Cooperation and Competition in Defense Technology

cuts better than their U.S. counterparts. They

are also better able to absorb dual-use technology. This is largely due to their commitment to marketing, manufacturing, and selling consumer products. For example, MHI,

Japan’s largest defense producer, dedicates

only 15 percent of its business to military

production, as compared to GD’s 85 percent

and Lockheed’s 95 percent.

Foreign companies have acquired U.S. defense industrial base assets in recent years,

and the trend appears to be increasing,

although the precise extent of foreign penetration is unknown. Foreign defense companies

increasingly seek strategic business alliances

with U.S. partners or acquisition of firms

located in the United States as a means to

penetrate the U.S. market.

If technology security and restrictive technology transfer policies are not reformed, they

will damage the international business prospects of U.S. companies. Many of the reasons

for which they were instituted have been

obviated by diffusion of defense technology

around the world, by recent political changes

in Eastern Europe, and by the decrease in

military tensions between the United States

and the Soviet Union. On the other hand, as

Third World conflict goes high-tech, controls

on defense-related collaboration and technology transfer to Third World countries may

become increasingly important and desirable.

A national security review of U.S. export

control policy has been ordered by the

President, and major changes are expected in

the Export Administration Act, which will be

considered by Congress in September 1990.

Western Europe

Defense budgets in Western Europe have

declined since the mid-1980s. With the rapid

collapse of Communist regimes in Eastern

Europe, further steep declines are anticipated.

At the same time, the Europeans expect that

increasing global overcapacity in the defense

industries will result in fierce competition .

with the United States-and perhaps eventually Japan and the newly industrialized countries-for shrinking defense markets in NATO

and Third World countries. Many European

nations, especially France, view arms exports

as an important element in the overall trade

picture.

European defense industries have been restructuring through mergers and acquisitions

to obtain the requisite size and technology

base to meet this challenge. In the key

aerospace and defense electronics sectors, the

trend is for each major producer (i.e., France,

Great Britain, Italy, and West Germany) to

retain one or two integrated national champions. These firms are creating intraEuropean strategic alliances through stock

swaps, joint acquisitions, and teaming on

specific projects.

Elements of national rivalry still exist among

major European defense producers. At the

same time, there is a strong trend toward

governmentally sponsored intra-European defense industry cooperation, centered on the

reactivated Independent European Programme

Group (IEPG). European defense industry

also benefits from a variety of government

supported cooperative research programs in

civilian dual-use technologies. EC 1992,

while ostensibly excluding defense trade, will

have a major impact in the defense area

because most major European defense producers have important civilian sector interests.

European industry considers access to the

U.S. defense market to be essential, but many

believe that the United States will eventually

be closed to direct sales. Accordingly, there is

increasing European interest in acquiring

U.S. defense suppliers and in teaming arrangements with U.S. prime contractors. The

full extent of European penetration of the U.S.

defense market is difficult to ascertain, but

there are indications of a significant increase

in the past several years.
Chapter 1--Interdependence in Defense Technology ● 17

. As a forum for coordination of Allied defense

industrial programs, NATO may have been

weakened by the activation of the non-NATO

IEPG, and the general increase in intraEuropean industrial cooperation. While all

members of the IEPG are also members of

NATO, the IEPG specifically excludes the

United States and Canada. The 1986 Nunn

amendment programs may be in jeopardy due

to expected budget shortfalls, a general shift

away from government-to-government collaboration, a redefinition of the military threat

to Europe, and pressures toward panEuropean defense programs.

● The United States and Japan have a long

history of collaboration in defense technology, dating back to the Mutual Defense

Assistance Agreement of 1954. Most cooperation has taken the form of coproduction,

with Japanese firms producing equipment,

initially developed in the United States, under

licensing agreements with U.S. defense companies. The FSX codevelopment project represents a radical departure from the established historical relationship.

. Japanese defense policies are changing in

subtle and significant ways. Japan has

dropped its requirement that defense spending be limited to 1 percent of GNP, although

the 1 percent level is still approximately

observed. In concert with Japan’s GNP,

Japanese defense budgets have expanded

rapidly in recent years, partly in response to

pressure from the United States to accept

more of the burden of defense in the Western

Pacific. In addition, the Japanese Government

has modified its prohibition on the export of

military equipment to permit the flow of

defense technologies to the United States.

Finally, Japan and the United States have

recently reached a basic agreement to cooperate on the research for three militarily critical

technologies. These changes have prompted

concern over what some analysts have called

the remilitarization of Japan.

●

●

●

●

Important Japanese companies like Mitsubishi, Toshiba, and Nippon Electric made

major investments in defense production in

the 1980s, and Japan now produces over 80

percent of its weapons and military equipment domestically. Nevertheless, these companies allocate only a small percentage of

production to defense. In Japanese companies, civilian technology flows easily into

defense applications and vice versa.

The United States increasingly depends on

Japanese manufactured items to build its

defense systems. The Department of Defense

and U.S. defense firms purchase significant

numbers of Japanese components for weapons systems assembled in the United States.

The degree of such dependence is unknown,

but there is general agreement that it is

increasing, especially in the field of hightechnology electronic parts and components.

One U.S. defense company indicates that it

conducted approximately 1 billion dollars’

worth of business with Japan over a 3-year

period.

The FSX controversy has complicated any

future collaboration between the United

States and Japan in defense technology. In the

United States, the press, the administration,

Congress, and defense analysts will follow

the deal closely for evidence of adverse

economic impacts or bad faith on the part of

the Japanese. In Japan, both industry and

government officials question whether the

United States will be a reliable partner in the

future. Most analysts agree the FSX controversy damaged relations between the two

countries.

South Korea is attempting to develop a

significant role for Korean defense firms as

suppliers of military parts and components to

major U.S. companies that produce defense

equipment. This strategy is due in part to idle

capacity (approximately 40 percent) in the

Korean arms industry. In sharp contrast to

Japan, Korean policy calls for export of arms

and defense technology. This policy created
friction between the United States and Korea

throughout the 1980s; in some periods, the

U.S. Government has denied over 50 percent

of South Korea’s applications to export

U.S.-origin technology to third countries.

South Korea lags far behind Western countries and Japan in defense R&D. Korean firms

have not yet devoted large resources to

military R&D. Throughout the 1980s South

Korean military R&D expenditures amounted

to only about 1.6 percent of military budgets.

It is not clear how the changes sweeping

Europe and the Soviet Union will affect the

security of the South Koreans. North Korea

possesses a formidable threat with armed

forces of over 1 million, an Army of over

800,000, 540,000 reserves that can be mobilized within 12 hours, 3,500 tanks, and over

4,000 heavy artillery pieces and rocket launchers. Given this threat, and their problems with

U.S. technology controls in the 1980s, it is

highly unlikely that the South Koreans will

abandon their drive to develop an advanced

defense industrial base in the near term, even

though they have recently agreed in principle

to normalize relations with the Soviet Union.

The United States has signed memoranda of

understanding regarding transfer of military

technology with most of the Association of

Southeast Asian Nations (ASEAN) countries.

In part, the United States supplies Indonesia,

Singapore, and Thailand with weapons systems and military technology to strengthen

security ties with the ASEAN nations. These

countries have all purchased F-16 fighters

from the United States or have placed orders

for them. They have not yet developed their

indigenous military industries to a point

where they could offer serious competition to

U.S. companies.

Australia purchases approximately 2 billion

dollars’ worth of U.S. military equipment and

technology a year. They require a 30 percent

offset for military purchases over $200 million. Australia is developing a defense industry, but maintains that its purpose is not to

compete with U.S. companies. Rather, they

hope to build an indigenous capability to

service equipment that is purchased from the

United States.
Chapter 2

Implications and Issues

for Congress
Figures

2-1. Balance of High-Tech Trade, 1970-88 . 0, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

2-2. U.S. Defense Contractors by Prime Contract Award, Fiscal Year 1989............28

2-3. Leading Arms Importers, 1987 ***. *.** ... .., *e.*.**...*....*.*.*****.*...*.*** . 34

2-4. Arms Exports, Cumulative Sales, 1977787 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

Page
Chapter 2

Implications and Issues for Congress

International collaboration in defense technology

is an extraordinarily complex business at best, and is

becoming increasingly messy as the old assumptions

of the post-WWII order give way to new forms of

technical, industrial, political, and alliance organization around the globe. We have entered a period

where dramatic restructuring of Eastern European

governments and East-West relations has been

superimposed on a process of gradual, but significant change in the balance of economic, technological, and military power in the international state

system. The context for U.S. arms cooperation with

other nations has shifted, not only with regard to

dramatic events in Eastern Europe, but also with

respect to the lowering of trade barriers and the

consolidation of the defense industries in the European Community. U.S. policy on arms cooperation

remains wedded to an older, simpler era. It has also

failed to adapt to the rise of economic nationalism in

the Western Pacific and the development of rival

defense industrial bases, both in Asia and in Europe.

WHY COLLABORATE?

Not many years ago, the United States collaborated with its NATO Allies to achieve objectives that

were easy to understand but difficult to implement.

As the undisputed leader of the Free World, the

United States sold military technology to the Allies

for the purpose of building up their defense and civil

industrial bases that had been devastated in World

War II. In the context of the Cold War, the United

States sought to enhance the overall military capacities of the NATO Alliance; to achieve economies of

scale, interoperability, and standardization of military equipment; and to maintain a coordinated

conventional deterrent to a Warsaw Pact invasion of

Western Europe. But the period of U.S. dominance

of defense technology and markets is over, and the

goal of setting and meeting common defense equipment requirements through transatlantic cooperation

has not been realized—although efforts to do so are

continuing.

Different nations collaborate in defense technology for different reasons. These include the nature of

the military threat, the structure of regional security

alliances, defense and political ambitions, economic

vitality, and the level of technological and industrial

development. Israel, for example, collaborates with

the United States, and a large number of other

countries, because its survival depends on the

capability of its armed forces, which was tested in

1948, 1956, 1967, and 1973. It has also benefited

through aggressive export of weapons made in

Israel. The Republic of Korea (ROK) faces a

significant and sustained military threat from North

Korea. It has collaborated primarily with the United

States because of the strength of the U.S.-ROK

security relationship since the Korean War. As the

United States contemplates reduction of its troops in

Korea, Korean interest in collaboration has increased as a means of building an indigenous

defense technology and industrial base. The Koreans

are beginning to look beyond the traditional U.S.

relationship for new partners, both in Asia and in

Europe.

Their close neighbors, the Japanese, have pursued

a very different strategy. Japan does not enter into

regional security agreements, and has cooperated in

defense technology almost exclusively with the

United States. Japanese leaders are politically wary

of investing in defense technology, and this has freed

them to concentrate their assets on technology and

manufacturing for consumer markets. Although the

Japanese generally prohibit the export of defense

technology, they have made an exception in the case

of the United States. On the other hand, they have

adopted a narrow definition of defense materiel, and

impose few prohibitions on exporting dual-use

items, even when they ultimately end up in the

arsenals of other nations.

In Europe, the situation is somewhat more complex, and it has evolved over time. Today, smaller

countries, such as Holland and Belgium, collaborate

largely because they do not have the financial

resources or industrial infrastructure needed to build

state-of-the-art weapons systems that require the

development of a full spectrum of advanced technology products. At the other end of the spectrum, the

major European powers, Britain, France, West

Germany, and Italy, are certainly able to build

modern defense systems, but they have chosen to

collaborate, often with other European nations, to

decrease costs, to achieve economies of scale, to

build their technology bases, and because they do

not fear the loss of business to foreign suppliers.

–21–
U.S. policymakers have tended to view international armaments cooperation as symbolic of NATO

Alliance cohesion and the strength of political

relations in the West. The U.S. position as a military

and economic superpower meant that it could

underwrite the security of the West, with little regard

to the cost of modern weapons, while its allies

viewed cooperation in defense technology in very

different terms.

The Europeans saw collaboration as a means of

acquiring foreign technology, employing local populations, building up industrial infrastructure, and

enhancing overall economic vitality. They have

been willing consistently to pay a substantial premium, either in terms of increased costs or decreased

military performance, in order to produce weapons

systems in Europe. A clear progression in the

structure of transatlantic cooperation in military

technology has coincided with these largely Eurocentric and national objectives.

Initially, the European powers bought U.S. military equipment through government-to-government

foreign military sales programs. But while different

nations pursued different strategies, and the details

varied significantly from one collaboration to the

next, a clear pattern emerged. The next step was to

engage in licensed production or coproduction of a

limited number of military items, usually because

the European ally could not afford to produce the

system independently. Soon, however, the acquiring

nation demanded a piece of the action, sometimes in

the form of a direct offset agreement to produce a

component of all future copies of the system in

question. The next step was to engage in cooperative

codevelopment of the next generation of an existing

weapons system. Finally, the acquiring nation or

group of nations undertook production of an indigenous fighter, tank, radar, or other system. For most

of our NATO Allies, the answer to the question

‘‘why collaborate?’ is simple enough: to share costs

and to further the drive toward national or regional

self-sufficiency in the development and production

of military technology and systems.

This process, which might be called ‘‘indigenization, " is somewhat oversimplified above, but it has

not been limited to NATO. Our allies in the Western

Pacific have also increased their military power by

tapping into U.S. defense technology. Japan has long

depended on the United States to provide technology

needed to produce its military aircraft. Of the 36

types of aircraft flown by the Japanese Self Defense

Forces, 9 were purchased directly from the United

States, 16 were coproduced, and several are copies

of low-technology U.S. aircraft.1 Part of the controversy over the FSX fighter deal with Japan stemmed

from concern in Congress that the Japanese had

indeed progressed to the phase of codevelopment of

a next generation fighter to follow the F-16. The

irony was that the Japanese initially planned for

indigenous development of the FSX, and were

dissuaded by the efforts of the U.S. Department of

Defense (DoD).2

The military aspect of international trade in

defense technology takes on added dimensions in

East Asia, where nations, such as Japan and South

Korea view defense collaboration as part of an

overall industrial and technology strategy. This can

be seen in the way that they have organized their

industrial bases to include defense production.3 The

United States appears to be alone among advanced

industrial nations in its rigid institutional and legal

separation of the production of military and civilian

technologies. DoD regulations make it extremely

difficult for a large company to organize itself to

produce military materiel and consumer products

under one administrative roof.4

Many European defense executives have commented that Europe does not have a defense industrial base. Instead, major companies that produce

weapons also make consumer products and so are

part of one integrated industrial infrastructure.5 In

Japan, military and civilian technology are pursued

l~~~d J. smue~ et ~., ‘‘Defense Production and Industrial Development: The Case of Japanese Ainxa@” MIT Japan Science and Technology

Prograrq 1988, p. i4.

Zsome ob~mers ~~ae titJqm ofig~y pl@ to buy a new fighter off-thmhelf from a U.S. defense company. SW C@Je v. ~estowiti,

Jr., Trading Places (New York NY: Basic Books, Inc., 1988), pp. 10-11.

SW asp~t til~ taken Up in greater detail in the fd report of this assessment.

d~ ~em tit efist ~~=n tie civilian and military sectors of the economy are e xa.mined at length in U.S. Congress, Office of Technology

Assessment, Hdiing the Edge: Mainrtzim”ng the f)efense Teclvwbgy Base, OTA-ISC-420 (Washington DC: U.S. Government Printing OflIce, April

1989), St% ch. 9 and paSSiIU. .

5Fmm a Wor-p on Transa~tic coo~~ion in Defem Tmhnology-Emo~an pem~ctiv~, held at the office of T(xhnoIogy AS~sSment On

Sept. 11, 1989.
Chapter 2--Implications and Issues for Congress ● 23

under a single industrial structure, where military

production typically accounts for less than 15

percent of a company’s sales. Because their defense

industries are less insulated from civilian economic

activity, many Asian and European companies are

better positioned to take advantage of the dual-use

aspects of technology, to apply advances in consumer electronics, for example, to military systems.

Similarly, new military innovations, whether produced at home or acquired through international

collaboration, can more easily be engineered into

civilian products. Nations and companies collaborate to gain new technology, technology that can be

moved from military to civilian applications within

the divisions of a single company or group of

companies.

Some military analysts believe that the United

States must maintain a separate defense technology

and manufacturing base if it is to retain its role as a

military superpower in international affairs. To be a

superpower, it is necessary to produce leading-edge

military technologies in many different fields. They

distinguish rigorously between dual-use manufactured items, such as advanced semiconductors, that

are increasingly incorporated into U.S. weapons

systems, and state-of-the-art military technologies

needed to build an Advanced Tactical Fighter

(ATF), a National Aerospace Plane (NASP), or

Strategic Defense Initiative (SDI) systems. Japan

excels in the former but is not in the same league

with the United States in the latter. Accordingly, the

ATF, NASP, and SDI systems would not be built if

the Nation relied on the civil industrial base alone,

because business would not make the necessary

investment in R&D with no civilian market to justify

it.

But the argument can be taken a step farther. If the

military depends too heavily on dual-use technology, it will lose its leadership position because

dual-use technologies are more widely available,

and most modern militaries have them. The only

reason that the United States leads Europe and Japan

in next-generation defense systems is that the United

States has made the investment in military-specific

technologies that may not have civilian applications

for many years, if at all. In this view, the United

States will have to retain the kind of defense

industrial structure that it has today, including a

largely separate manufacturing infrastructure for

weapons systems, if it is to retain its superpower

status. These analysts argue, accordingly, that a

decision to reduce the defense budget drastically in

response to the end of the Cold War would also be

a decision to abandon leadership as a military power.

From a military perspective, these factors tend to

militate against international collaboration. As one

high-ranking officer put it: “If we want to stay a

superpower, we will invest to be ahead of the world

in next generation systems . . . Otherwise, we are

co-developing and therefore not leading. We lose the

superpower label. ’

The reasons why the United States collaborates

with its allies in military technology are no longer as

clearly defined or as universally accepted as they

once were. Indeed, the center of gravity in international collaboration has shifted away from governmentto-government agreements, which were largely driven

by foreign policy objectives and Alliance military

strategy. Most collaboration is now initiated on an

industry-to-industry basis, where U.S. defense companies enter into licensing agreements, joint ventures, codevelopment arrangements, and business

alliances with foreign companies.

The dilemma for policymakers is that the interests

of the U.S. defense companies may not coincide with

the future national interests of the United States.

This divergence will increase to the degree that

present negotiations for the reduction of troop levels

and conventional forces in Europe are successful.

For example, if future arms control agreements ban

or obviate the need for planned follow-on forces

attack systems, it would no longer be in the interests

of the United States to build them, even though

revenues for U.S. defense companies would be

substantially reduced.6 Beyond this obvious impasse, there are other, more subtle points of divergence.

Many large U.S. defense companies, for example,

seek to increase their international business as part

of a strategy to survive large program cancellations

and budget reductions in the future. They hope to use

international collaboration to enter foreign markets,

where demand for their products is still high and

profits are not regulated. The motivation behind

their international operations is to make money, and

properly so, from a business perspective. These

6FOFA ~~d~ for F~ll~w+n Forc~ Attack$ For a complete ass~sment of FOFA, wx U.S. Congress, ~lce of T@hnoIow &W.SSIrKllt, NeW

Technologies for NATO: Implementing Follow-on Forces Attack, OTA-ISC-309 (Washingto& DC: U.S. Governme nt Printing Office, June 1987).
companies argue that cooperation allows the United

States to exploit foreign technology, to obtain the

best defense products at the lowest price, to sell to a

much larger market, and to ensure the future

viability of the U.S. defense industry.

But from a national perspective, international

collaboration can increase U.S. dependence on

potentially unreliable foreign sources to unacceptable levels, erode the middle tiers of the U.S. defense

industrial base, take business away from U.S.

companies and jobs from U.S. workers, and transfer

valuable technology to competitors that may later be

used to penetrate civilian markets in the United

States.

Perhaps most important, industry-to-industry collaboration reduces government control over the

distribution of advanced defense technology. In this

respect, governments have always controlled the

output of the defense companies, because the

allocation of sophisticated weapons can change the

balance of power among nations in the international

state system. Stated more simply, we don’t want to

sell them something that might ultimately be shot

back at us. The privatization of international defense

cooperation raises vexing issues for U.S. policy on

international collaboration. These are discussed in

greater detail in the final section of this chapter.

THE DEFENSE TECHNOLOGY

ENVIRONMENT HAS CHANGED

Changes in the balance of both economic and

technological power between the United States and

its allies in Europe and Asia have reshaped the

environment in which cooperation in military technology takes place. But relevant U.S. policies have

remained largely the same. Changes in the environment of defense technology, alone, would require

different policies and a different approach to cooperation with our allies in the development and

production of future defense equipment. Unfortunately, Congress will have to face an already

difficult policy environment that has been made

more complex by a sea change in relations between

the United States and the Soviet Union, and the

political restructuring of some half dozen nations in

Eastern Europe.

Trends in Defense Technology

Perhaps the greatest change in the past decade is

that technology leadership in defense has dispersed

around the world. Today, the ability to produce

advanced technology with military applications is

widespread, and the United States is no longer the

leader in some technologies that are vital to military

systems. The United States still produces state-of-theart and next generation defense systems and equipment, and the sheer size of its market and industry

creates the illusion that it is far out in front of the

European powers, the Japanese, and others.7 But

advances in military and dual-use R&D, technology

and manufacturing capacity in Europe and Asia have

created rough equality on three continents for many

different technologies used in building defense

systems. This can be seen in the successful efforts of

European defense firms to penetrate niche markets

in the United States by forming alliances with U.S.

prime contractors. One incentive for the U.S. partner

is to gain access to first rate foreign technology;

another is to gain reciprocal access to foreign

markets.

But proliferation of increasingly capable centers

of defense technology has also created global

overcapacity in many defense industries.8 By building up the military and industrial capability of its

friends and allies, the United States has also helped

to create formidable competition for shrinking

defense markets. Even before the relaxation of

military tensions between NATO and the Warsaw

Pact, the defense industries of the West and of the

Far East were characterized by growing overcapacity. In South Korea, for example, the defense

industry is presently running at 60 percent of

capacity. In the United States, Congress and the

Department of Defense have funded acquisition and

procurement of military systems to support many

more production lines than can be justified on both

national security and economic efficiency grounds.

The problems associated with technological leveling in the military sphere are linked closely to the

fate of U.S. technology and industrial leadership in

%deed, the United States is a leader in many military fields, such as those related to signature control and nuclear directed energy weapons, that

are so expensive or so military-specific in application that other nations have not pursued them.

% the period from 1982 to 1987, world arms imports and exports decreased by 4.6 percent. At the same time, world rnilitaryexpenditures increased

by 1.8 percent, indicating that there are fewer foreign outlets for increasing defense capacity. Data taken from tables 1,2, and 4 in U.S. Arms Control

and Disarmam ent Agency, World Military Expenditures and Arms Tran@ers 1988, June 1989, pp. 2, 4, and 7.
Chapter 2--Implications and Issues for Congress ● 25

$billions

Figure 2-l—Balance of High-Tech Trade, 1970-88

!

2 5 -

20-

15-

10.

5-

0- J 1 0

1

-5 J

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988

Year

SOURCES: U.S. Department of Commerce and National Science Foundation, 1989.

general. A generation ago, U.S. technology led the

world, and military technology in particular was

unrivaled. Two trends have changed this picture

substantially. The first is that military procurement

no longer drives innovation in the United States;

much leading-edge technology is now pulled forward by markets for consumer goods. Second, U.S.

manufacturing and sales have taken a back seat to

foreign competition in one product line after another. Today, there are large areas in consumer

electronics where the United States is not a significant player, and emerging technologies, such as

high-definition TV, where the United States may

never get into the game.

This is a significant problem because the distinctions between military and non-military technology,

industry, and markets are breaking down. If the

United States cannot compete in international consumer markets, it will ultimately come to depend on

foreign dual-use technology in the production of the

next generation of weapons. In this context, the U.S.

negative balance of trade in high-technology goods

with both the European Community member nations

and Japan takes on greater weight. (See figure 2-l.)

There is substantial evidence that Japanese and

European firms produce critical parts and components for U.S. defense systems.9 Of the 20 technologies listed by DoD in its 1990 “Critical Technologies Plan” at least 15 are dual-use.10 These include

microelectronic circuits, software, robotics, photonics, composite materials, superconductivity, and

biotechnology, among others. (See table 2-l.) Japan

is a leader in many of these technologies, and exports

them to the United States and other countries both

for civilian and for military use.

Substantial interdependence already exists between the United States and its allies, from innovation through production, in technologies used in

military systems, and it is likely to increase in the

future. Dependence is incurred directly by many

different types of international collaboration, including joint ventures, strategic alliances, codevelopment, and direct offsets. But it is also built into the

structure of global competition and trade in dual-use

technology among the advanced industrial, marketoriented countries. It is difficult to imagine a future

in which some degree of collaboration in military

technology is not economically and technically

necessary. These changes in the environment of

defense technology necessitate a rethinking of the

meaning of national security and its relationship to

overall economic competitiveness.

9s~ Martin C. Libicki, Jack N- and William Taylor, U.S. Industrial Base Dependence/Vulnerability: Phase II-Analysis (WashingtoxL DC:

National Defense University, November 1987), ch. 3 and passim.

1~.s. ~p~mt of D~e~e, Cnrica/ Te~hno/ogies plan, p~p~~ for tie co~tt~s on ~~ Sewices, U.S. Congress, m. 15, 19~, p. ES-1.

(Y –f, 1 1 0 – go _ 2
Table 2-1-Summary of Foreign Technological Capabilities

Critical technologies Dual-use U.S.S.R. NATO allies Japan Others

Israel

Various countries

Switzerland, Israel,

Hungary

Finland, Israel,

Sweden

Various countries

Sweden

Sweden, Israel

Various countries

Israel

Sweden, Israel

India, China, Australia

Various countries

Israel

Switzerland

Various countries

1. Semiconductor materials and

microelectronic circuits . . . . . . . . . . .

2. Software producibility . . . . . . . . . . . .

3. Parallel computer architectures . . . .

4. Machine intelligence and robotics . .

5. Simulation and modeling . . . . . . . . . .

6. Photonics . . . . . . . . . . . . . . . . . . . . . .

7. Sensitive radars . . . . . . . . . . . . . . . .

8. Passive sensors . . . . . . . . . . . . . . . . .

9. Signal processing . . . . . . . . . . . . . . .

10. Signature control ... , . . . . . . . . . . . .

11. Weapon system environment . . . . . .

12. Data fusion . . . . . . . . . . . . . . . . . . . .

13. Computational fluid dynamics. . . . . .

14. Air-breathing propulsion . . . . . . . . . .

15. Pulsed power . . . . . . . . . . . . . . . . . . .

16. Hypervelocity projectiles . . . . . . . . . .

17. High-energy density materials . . . . .

18. Composite materials. . . . . . . . . . . . .

19. Superconductivity . . . . . . . . . . . . . . .

20. Biotechnology materials

and processes . . . . . . . . . . . . . . . . . .

* **** **

*

*

**

+*

**

**

+*

**

* *** **

**

*

**

**

*

*

***

+**

**

in Europe. This has profound implications for the

structure of the defense industries and the kinds of

international collaboration that will be undertaken.

Fundamentally, future defense collaboration is tied

to the future of the defense industries. As defense

business declines, is not clear whether international

collaboration will be used to create new efficiencies

in defense production, or whether regional and

national policies will be instituted to bolster indigenous defense industries.

Deepening detente with the Soviet Union has

created vast uncertainties for U.S. defense strategy

and policy. It has also introduced a measure of

uncertainly into the economic and political future of

the European Community. While it is difficult to

remove the clouds from the crystal ball as yet, there

are some constants. First, the trends in defense

technology, identified above, are unlikely to be

reversed by these political events. Instead, they will

probably be aggravated by dramatic movement

associated with the end of the Cold War. For

example, the Bush Administration has already

suggested reducing the barriers to technology transfer to Eastern European nations. In time, hightechnology centers may evolve in countries that are

now members of the Warsaw Treaty Organization,

especially if German reunification proceeds quickly

or if the European Community is expanded to

include one or more of the Eastern European states.

The motivations that led the United States to

collaborate with its allies in Europe have been

weakened, if not altogether removed, by changes in

the balance of transatlantic economic and technological power, and by the rush of recent events in

Eastern Europe. The United States collaborated to

build up Allied defense capacity, and as a symbolic

enterprise to enhance the stability and cohesiveness

of NATO. But as the U.S. lead in defense technology

declines, and as the economic and technological

strength of Europe expands, U.S. policy is becoming

increasingly anachronistic. Similarly, as the threat of

Soviet aggression recedes, and U.S. influence in

NATO diminishes, enhanced European collaboraOf more immediate concern, problems of overcapacity in the defense industries will be compounded

as defense budgets fall, both in the United States and
Chapter 2--Implications and Issues for Congress ● 27

tion in defense technology may become a vehicle for

political consolidation of NATO Europe, replacing

former U.S. efforts.

But the future of transatlantic collaboration, as

well as cooperation with allies in the Western

Pacific, does not depend on government policy

alone. Industry-to-industry collaboration, the dominant form of defense cooperation, requires only an

official nod, and is motivated by factors more

tangible than alliance relations. It depends as much

on the ability of large defense companies to engage

in and make profits from defense markets around the

world. Changes in U.S. Government policy, recent

political changes in Europe, and changes in the

environment of technology will all influence the

structure of the defense industries in the near term,

both in the United States and around the world. The

remainder of this chapter discusses the structure of

the U.S. defense industries, U.S. defense industrial

policies, and the issues that are likely to require

congressional consideration in the 101st and 102nd

Congresses.

CHANGE IN THE DEFENSE

INDUSTRIES

Over the past decade important sectors of the U.S.

defense industry have internationalized their operations to respond to global changes in the environment of defense technology. In discussions with

OTA staff, several of the largest defense contractors

indicated that they conduct 15 percent or more of

their defense business on an international basis.

Because international operations are not as closely

regulated by the U.S. Government, this 15 percent

often translates into more than 25 percent of profits,

adding pressure for increased penetration of foreign

markets. 11

These companies would like to follow the lead of

their civilian sector counterparts or parent companies, and conduct operations on a global scale,

exporting production and even R&D when it makes

business sense. They have not been able to do this

because U.S. defense policies have combined to

make global operations less attractive or to prohibit

them altogether. As one top defense executive put it:

We are exporters. We are not a global company

because we have retained most of the capability for

production in the United States. But we are international in our operations, in buying and selling, in

joint ventures, strategic alliances, and in codevelopment and production arrangements. The best thing

government could do for our international business

would be to get out of the way.

The industries that supply defense equipment and

conduct defense R&D in the United States can be

divided into three broad groups. They are and will be

affected differently both by U.S. policy on international collaboration and by projected reductions in

defense budgets. The first group is comprised of

some 50 of the largest defense contractors through

which approximately 60 percent of the acquisition

budget flows.12 (Figure 2-2 displays the 20 largest

defense contractors and their total contract awards in

fiscal year 1989.) These companies, among others,

have the capacity to enter into sophisticated international ventures. They are pursuing a number of

strategies to cope with anticipated program cancellations and budget reductions.13

First, they are seeking additional international

business and access to new foreign markets where

profits are greater because they are not subject to

regulation by the Department of Defense. Second,

they are tightening their belts by dropping unprofitable operations and reducing their work forces. One

of the largest companies is now in the process of

laying off approximately 15,000 workers. Finally,

they are working more closely with a smaller

number of suppliers, and moving attractive production opportunities in-house as a way to increase

revenues in a declining domestic market. By making

these changes, these large companies hope to

improve their chances of remaining in business

during the coming defense downturn. There is a

good chance that some will not.

1 Isome aIMIyStS ~~eve that foreign business is more profitable because fixed costs are amortized over U.S. production only, kIW@ a kger Profit

margin for foreign sales at the same unit price. However, defense company executives argue that foreign sales reduce costs to the U.S. Government

because they increase production runs, thus introducing economies of scale.

l~lms~c~a~ from “me Top 200 Defense Conmctors, “ Military Forum, vol. 6, No. 1, August 1989, pp. 15-16.

Is-y of ~w comp~= bo~owed a ~~t d~ of money to invest in the development of new weapons systems d-he Ream Atis~tion

defense build-up, systems that may never be produced. Defense companies have written off about $2 billion over the past 2 years, including bckheed

Corp. ($500 million), Northrop Corp. ($337 million), Honeywell Inc. ($200 million), Unisys Corp. ($150 million), General Dynamics ($125.8 million),

McDonnell Douglas Co. ($124 million), and United Technologies ($1 14 million). Defense News, vol. 5, No. 3, Jan. 15, 1990, p. 25.
Figure 2-2—U.S. Defense Contractors by Prime

Contract Award, Fiscal Year 1989

McDonnell Douglas 8.6

General Dynamics

General Electric

Raytheon

General Motors

Lockheed

United Technologies

Martin Marietta

Boeing

Grumman

GTE

Rockwell

Westinghouse Electric

Honeywell

Litton

IBM

TRW

Unisys

ITT

Texas Instruments

1 1 I 1 I I I I I I

00 10 20 30 40 50 60 70 8.0 90

$ billions

SOURCE: Data from U.S. Department of Defense, 1990.

Not all sectors of the defense industries are able to

pursue these strategies. A second group of companies, sometimes referred to as the defense subtiers,

depend on a chain of subcontracting arrangements

descending from the first group of companies, the

large system integrators, for most or all of their

business.14 They are largely U.S.-owned, and most

do not possess the financing or the know-how to

enter into international business arrangements. They

include large electronics houses as well as small,

specialized machine shop operations. In recent years

a small percentage of them have been bought by

large foreign companies that seek an American

presence as part of a long-term strategy of penetrating the U.S. defense market. In the past these subtier

companies have been protected from the forces of

international competition by a variety of defense

policies. But the increasing internationalization of

defense business poses a competitive threat to them.

In the context of a defense downturn, they tend to

view international defense business as a less-thanzero sum game. They have benefited from participation in the largest and possibly most protected

defense market in the world. They will likely sustain

heavy casualties in the context of shrinking defense

budgets, opening defense markets, and global overcapacity in defense production.

A final group of companies that supply parts and

components for defense resides at the lower tiers in

the chain of subcontractors. These are companies

that do most of their business in the nondefense

sector of the economy. Many operate globally and

produce high-technology products; some do not

maintain manufacturing operations in the United

States. Because they do not depend on defense for

any substantial part of their sales, most will be only

marginally affected by changes in U.S. defense

policies and by declines in domestic defense production. These companies are also largely exempt from

the defense regulations that influence firms higher

up the subcontracting chain because DoD specifications, regulations, and auditing procedures usually

cannot reach them.15

These companies produce many of the dual-use

technologies that were listed in the DoD “Critical

Technologies Plan” and that are used in U.S.

defense systems. Because there are often many

levels of subcontractors between the dual-use suppliers and the initial prime contractor, DoD has few

records that describe them as a group.16 Most of

them would probably be unwilling to tolerate the

government scrutiny that is typical in defense

contracting at the middle and upper tiers of the

defense industries. This group is important to

defense, however, because they develop much of the

innovative and leading-edge technologies needed

for next generation weapons systems. But their

involvement in defense is a double-edged sword; the

technologies and products these companies supply

also introduce a large measure of dependence on

foreign industry and sources.

DEFENSE INDUSTRIAL POLICY:

WHAT HASN’T CHANGED

In considering any future policy framework for

international defense cooperation, Congress may

wish to take into account the strengths and vulneraIA~e ~ge comp~es in the first group often perform subcontractor work for other large companies (and occasionally for smaller ones). COmPtiM

in tbis second group can be prime contractors, but usually are not. Some provide ftished products that are sold di.met.ly to the government (e.g., radios,

boots, pistols, etc.), but most produce parts that are integrated into larger systems (e.g., signal pmcessws, sensors, fuel tanks, motors, etc.).

15For p~~s of ~n~ct Conlpliance, a prime contractor relies on its second-tier contractor to COrlfikI that d Sd3COIltIllCkd gOOdS ~prOdUCd

to specflcation. There are some auditing and compliance procedures at this level. But the second-tier subcontractor relies in turn on the assurances of

the third-tier subcontractor, and soon down the line. At some point, the auditing trail ends, and the governm ent is unable to determine who the acturd

supplier is, and whether the part or other item in question was foreign-soured.

ls~ one ~uenti~me~ of ~Rfense Manufacturing Board put it “Once you get down bdOW the level of the primes, DoD dmsn’t bow what

in the hell is going on. ”
Chapter 2--Implications and Issues for Congress ● 29

bilities of the different industrial sectors that supply

defense. To a great extent, U.S. Government policy

already shapes and controls the structure of the

defense industries, the international arrangements

they may engage in, and their access both to

domestic and foreign defense markets. European and

other foreign observers have long insisted that in

matters of defense industry and technology, the

United States does have an industrial policy. They

have been quick to add that it is an awkward and

inefficient one. Nevertheless, the U.S. defense

market is highly protected; DoD routinely picks

winners and losers, especially in the winner-take-all

sweepstakes for major weapons systems; DoD

supports excess capacity, most notably in the

aerospace industry; and DoD regulations result in

separate defense and nondefense industry operations.

How does U.S. policy ensure a largely protected

marketplace for domestic defense companies? Compliance with the Defense Federal Acquisition Regulations alone is so complex that few foreign firms

can manage it without a significant U.S. presence. In

addition, the security classification system serves as

a major nontariff barrier to foreign entry into the

market. When a U.S. defense company is acquired

by a foreign-owned corporation, its security clearances can be withdrawn, and it may be required to

shut its doors to further work until the clearances are

restored. Depending on the nature of the defense

work and the ownership of the company, this can be

a long, drawn-out procedure, and reinstatement of

clearances can be denied for a variety of reasons that

are difficult to challenge. Accordingly, many foreign

firms that seek to penetrate the U.S. market form

alliances with or become subcontractors to established U.S. prime contractors, and avoid equity

investments in U.S. defense companies.

In addition, scores of major U.S. defense programs are ‘black’ or special access programs. This

means that they are so highly classified that information about the program is compartmented, so that

even the contemplated scope of work is unavailable

to foreign fins. Projects on the scale of the B-2

bomber have been classified as entirely special

access programs. By making a program ‘black, ’ the

DoD has, in effect—if not by intention-protected

participating U.S. industry from unwanted foreign

competition. During the Reagan Administration

spend-up, an unprecedented number of programs,

and a large percentage of the acquisition budget, was

dedicated to special access activities.

Beyond this, dozens of U.S. laws contain “buy

American’ provisions that are applicable to defense

procurement.

17 Although some buy American legislation can be waived on the authority of the

Secretary of Defense, as is routinely done in

country-specific, reciprocal memoranda of understanding, these provisions set a tone and preference

that is adhered to by many DoD officials. Finally,

there is a strong bias against foreign technology that

stretches the length of the chain from the Services,

though the Office of the Secretary of Defense up to

Congress and back. In addition, many DoD officials

hold the view that foreign defense technology is

inferior to that produced in the United States. The

overall effect is that most U.S. defense work is done

by companies owned and operated in the United

States, and that the various mechanisms for international collaboration form an exception to the rule.

Finally, under mobilization base rules, DoD may

restrict a procurement to the North American industrial base if it finds that the product or component in

question is necessary to sustaining critical U.S.

production capabilities in times of crisis or conflict.

In practical terms, foreign companies have come to

believe that they must locate facilities in North

America in order to sell to DoD, although a mix of

off-shore and on-shore production is often sought as

a compromise.

A variety of U.S. laws and regulations create de

facto separation of the defense and civil industrial

and technology bases in the United States. In

general, companies in the upper and middle tiers of

the defense industries do most of their business with

defense customers, domestic and foreign. This

situation did not arise because executives made a

decision to be in defense work and to reject

nondefense opportunities. It occurs because U.S.

laws, DoD regulations, and auditing procedures

virtually require that a company organize itself to do

nothing but defense work, and do it in ways that are

not cost-effective in the civilian sector.

The fact that many U.S. defense companies

depend on defense contracts for most or all of their

business makes them more vulnerable to defense

downturns than the competition in Europe and

ITSee U.S. Department of Defense, “The Impact of Buy American Restrictions Affecting Defense Procurement,” July 1989.
30 ● Arming Our Allies: Cooperation and Competition in Defense Technology

Japan, where defense and nondefense work is more

often and more easily integrated into a single

corporate structure. Suppose, for example, that

defense production is reduced by 50 percent, both in

the United States and in Japan. A U.S. company that

conducts 85 percent of its business in defense might

be forced to close its doors. Its Japanese counterpart,

that depends on defense work for only 10 percent of

its business, would be able to absorb the cuts far

more easily. In addition, because it combines

civilian and defense operations under a single

administrative roof, the Japanese company may be

better positioned to convert its defense manufacturing to production for civilian purposes. As Congress

grapples with the question of converting the defense

industries to nondefense operation, it may be necessary to begin by eliminating the legal and administrative impediments to conversion.

POLICY ISSUES FOR THE 1990s

If Congress can make defense industrial policies,

Congress can also change them. If the policies that

created the structure of the defense industries and

control international collaboration in defense technology are inadequate or irrelevant to today’s

circumstances, Congress can revise them. Congress

faces an unprecedented situation and a unique

opportunity in trying to ensure the future national

security of the United States. Many aspects of

today’s defense policies, particularly those that

affect international collaboration, are inadequate or

counterproductive. Consequently, Congress will have

to address a number of difficult policy choices, if it

is to be a major player in the adjustment and

restructuring of the defense industries.

In this, as in so many areas, Congress finds itself

between a rock and a hard place. Many analysts will

urge caution because so much uncertainty exists as

to the nature of future military threats, the successor

failure of perestroika, and the affect of German

reunification on East-West relations and the economic integration of Europe. They would stay the

hand of Congress until more is known.

Alternatively, if Congress fails to act, the defense

companies will move to restructure their domestic

and international operations in response to economic

forces. Many large defense companies are now for

sale, but as yet there are few takers. As budgets fall,

companies that are able to get out of the defense

business may do just that, leaving behind the less

capable that have few options. Accordingly, the

United States may end up with a defense industrial

structure unable to meet the future defense needs of

the Nation.

Revamping the Defense Industrial Base

The frost two issues relate to basic structural flaws

in the organization and operations of the U.S.

defense industrial sector. In a time of plenty, when

U.S. defense technology was preeminent throughout

the world, large scale inefficiencies, such as the

separation of defense and nondefense manufacturing

infrastructure, and the protection of defense industry, could be sustained. This is much less true today,

and will soon present an acute problem to Congress,

as demand for defense equipment dwindles, and

competition among the defense industrial and technological centers of the world drives many firms out

of the defense business.

Issue 1: Protecting the Defense Industries

U.S. policy has been to protect the defense sector

from most forms of international competition. So

long as the defense industries were strong in the

United States, and there was little competition from

abroad, the degree of protection was not a significant

issue, except to our Allies who complained that the

“two-way street” in NATO armaments cooperation

was a superhighway to Europe with a dirt road back.

In recent years, however, direct cooperation between

U.S. and foreign companies has increased international exchange and commerce in defense technology. Moreover, the environment of defense technology has changed so significantly in the past decade,

and promises to change even more radically over the

next few years, that the fate of the defense industries,

both here and abroad, is uncertain.

In the context of diminishing defense dollars and

worldwide overcapacity, demands that Congress do

something to assist the domestic defense industry

are certain to mount, particularly as congressional

districts register the impact of increased international competition and decreased production, and

most directly when plants close and jobs evaporate.

These demands will be difficult to resist, and will

emanate from different sectors of the defense

industry. They are likely to defy panacean remedies,

and will probably create conflicting initiatives

within the executive branch. The large companies

will lobby for increased internationalization of the
Chapter 2--Implications and Issues for Congress ● 31

defense industry, so that they can have freedom and

flexibility to enter into deals that make money,

irrespective of the impact on the domestic industrial

base. Thus, they will ask for relaxation of technology security controls, and for policies that promote

greater access to foreign markets.

On the other hand, many of the smaller, middletier subcontractors would likely view increased

internationalization and openness in the U.S. defense market as a disaster. Many believe they will

lose subcontracts to large foreign firms, who will

work with their own supplier bases, and there will be

far less business in the United States. Foreign

governments and defense firms would of course

demand reciprocal penetration of the U.S. market,

and the ability to sell U.S.-origin technology and

components to third country arms markets.

As Congress moves toward reauthorization of the

Defense Production Act, and proposes related legislation to support the U.S. defense industrial capacity,

it will have to balance the need to retain a strong

defense industry at home against the increasingly

internationalized character of large U.S. companies,

defense technology, and defense markets. There is

concern in many quarters that the defense industrial

base in the United States is eroding quickly,

although the data that supports this thesis is weak,

and there is a movement in Congress to do something about it. One prominent approach is to define

what a U.S. company is, and then to create preferential treatment for U.S. companies through a variety

of mechanisms.

It is extremely difficult, however, to define what

a U.S. company is in a way that supports domestic

R&D and production of defense materiel without: 1)

excluding a great many capable firms (both defense

and civilian) already producing in the United States,

and 2) damaging the international business and

profitability of the largest U.S. defense companies

that are committed to international business relationships with foreign companies. In would be ironic,

indeed, if policy frees aimed at strengthening the

defense industrial sector led to the collapse of the

international business of large U.S. defense companies.

The policy dilemma here is that the interests of

different sectors of the defense industries can easily

be pitted one against the other. A prudent strategy

would encourage a strong domestic defense industrial structure and, at the same time, recognize that

international business cooperation in defense has

become a very important element in the overall

picture. Beyond a doubt, the actions that Congress

takes in this area will become increasingly important

as the defense industries restructure their operations

in response to anticipated budget declines. Ultimately, a sound policy will assist in managing the

transition of the defense industrial base to a lower

level of defense activity and into productive civilian

enterprises.

Autarkic policy fixes are likely to exacerbate the

problem. Rigorous enforcement of buy-American

legislation, a surcharge on foreign-produced defense

materiel, or a blanket requirement to tighten protection over a 5-year period would likely hold undesirable consequences for the U.S. defense community

and for international relations. First, it would decrease U.S. access to advanced foreign defense

technology. Second, it would weaken the incentive

for some U.S. defense companies to stay at the

leading edge (and might increase costs) because

companies would have a guaranteed market. Moreover, with reduced competition, there would be even

less incentive to modernize plants. And finally,

increased domestic protection would engender reciprocal protectionism abroad, with the result of

sharply decreased profits for the largest U.S. defense

aerospace and electronics industries.

On the other hand, a policy that opened the U.S.

defense market, relaxed technology security controls, and encouraged international collaboration

would create stiffer competition for the smaller and

middle-tier defense companies. In addition, in the

context of a general reduction in Western defense

budgets, opening markets might also create vulnerabilities for some of the largest U.S. defense companies, particularly those that have recently posted

poor earnings, are now for sale, or teetering on the

verge of bankruptcy. In the increased competition

that would result from such a policy, structural

overcapacity in many vital sectors of the U.S.

defense industries might lead to the closing of major

divisions or companies, probably starting in the

aerospace sector, where competition for limited

business is already intense.

Clearly, expected contraction of the defense

industries places Congress in a delicate position,

where conflicting demands of powerful interests

must be balanced against the national security.

Accordingly, when Congress debates new measures
to support the defense industries, or to convert

defense production to civilian purposes, a first order

issue will be the need to develop a strategy that

defines an acceptable level of defense R&D and

industrial capacity, that must be maintained in the

United States. Cost will bean increasingly important

factor. Part of this analysis would focus on how to

achieve a more integrated approach to civil and

defense manufacturing, with the recognition that a

great deal of technology for future defense systems

will be designed, developed and even produced in

the commercial, nondefense sector.

Issue 2: Integrating Defense and

Civil Manufacturing

A large number of studies and high-level reports

have called for reform of the acquisition system that

DoD uses to procure defense goods and weapons.

They have cited continuous cost overruns, spare

parts horror stories, a lack of open competition,

interservice rivalries and duplication of weapons

systems. Such reports and attempts at reform have

caused confusion and consternation within the

defense industrial sector, but have generally failed to

make defense procurement either more efficient or

less expensive. There continues to be the perception

that the more Congress tries to fix the system, the

worse it seems to get.

As OTA previously reported, many of the rules

and regulations that make defense industry inefficient and cumbersome were motivated by conscientious lawmakers and officials who sought to protect

the public interest, and to eradicate fraud and abuse

in matters relating to public funds. But the cumulative effect of regulatory controls is that the vast

bureaucratic overhead of government has been

extended into and replicated within the defense

industry itself. These rules and regulations have

created substantial barriers between the defense and

civilian industrial sectors.18

One result is that much potentially useful R&D

and productive capacity in the civil sector has been

decoupled from defense, probably to the detriment

of both sectors. Among advanced industrial nations,

the United States is the most extreme in the

separation of defense R&D and manufacturing

infrastructure from the larger civilian economy.

Both in Europe and in Japan, companies that build

defense systems have large scale civilian operations

as well. For this reason, they are better positioned to

take advantage of dual-use technology than are the

more highly defense-oriented companies in the

United States.

In the United States, several of the largest defense

prime contractors are wholly owned subsidiaries of

civilian companies. In discussions with these firms,

OTA staff were told that defense and civil divisions

do not share accounting, financial, personnel, or

other management systems, and in most cases, they

cannot even share technology. In one corporation,

the company makes satellites both for the military

and for civilian customers. Even where the mission

of the satellites is similar, the two divisions do not

share data, technology, personnel, R&D or manufacturing facilities.

Defense companies tend to focus on meeting

government requirements and have had little incentive to stay at the leading edge of manufacturing

technology. They have been able to do so only

because they are supported by government. If a

civilian industry falls behind in technology innovation or in manufacturing technology, it will soon be

supplanted by foreign competition. On the other

hand, most civilian companies do not know how to

meet all the requirements in the defense world. To

qualify and conduct business with DoD or its prime

contractors, civilian firms would be forced to

reorganize all phases of operations to meet government regulations and specifications. The result is

that legal and administrative requirements have built

rigid barriers between the civil and military sectors

of the economy, forcing DoD to maintain separate

corporate and manufacturing infrastructures dedicated to defense.

This way of doing business runs counter to world

trends in R&D and manufacturing, where technology is increasingly viewed as generic or dual-use,

and then is applied to military or civilian purposes.

In many Japanese and European companies, technology developed for consumer markets is modified

and then applied to military systems. In order to

implement this kind of technology path in the United

States, it would frost be necessary to change the way

the defense business is conducted in fundamental

ways.

18Holdi~g the Edge, op. cit., footnote 4. See ch. 9 ati p~Sti.
Chapter 2--Implications and Issues for Congress ● 33

Congress faces a situation where radical action

may be necessary because most of the quick frees

(and some hard solutions) have been tried and have

failed. But recent and ongoing changes in world

politics and in the global environment of defense

technology now offer opportunities that may not

have been available in the past. This Congress and

the next will have to choose between managing the

down-sizing of the defense industrial sector or

letting it be dismantled piecemeal in corporate board

rooms by managers seeking to cut their losses and

get out of the defense business.19 Clearly this is an

uncomfortable debate involving political risks to

members on one hand and risk to the security of the

Nation on the other.

But it is precisely this environment that creates the

opportunity and the forum in which to question

seriously the necessity for maintaining a separate

and highly inefficient R&D and manufacturing

infrastructure dedicated to defense.

The Role of Government in Defense Industrial

Cooperation

A second set of issues is closely related to the first.

It focuses on the appropriate conduct of government

as regards the international activities of the largest

defense corporations and the middle-tier companies

that support them. The present policy framework is

inconsistent because, at one and the same time, it

promotes internationalization of U.S. industry, hinders its operations and opportunities, and attempts to

protect the domestic market from significant or

unwanted foreign competition.

Issue 3: Globalization of the Defense Industries

The largest defense companies are not global in

the sense that the largest commercial multinational

corporations are. Governments, by tradition and of

necessity, exert far stronger controls over the business decisions and prospects of the defense companies. This is true even when a large defense firm is

wholly owned by a commercial conglomerate. Most

large defense companies have only recently learned

to go beyond foreign military sales, and to collaborate on an international scale. They have retained the

major portion of their R&D and manufacturing

facilities within the continental United States. While

the largest defense companies increasingly enter

into codevelopment, coproduction, joint ventures,

and strategic alliances with foreign firms, most are

U.S.-owned and operated, and they are subject to

extensive regulation by the U.S. Government.

Nevertheless, the distinction between an international company and a global one is largely a matter

of degree. The policy problem centers on how to

regulate sales abroad of U.S.-made weapons in the

presence of an international or global arms industry.

For example, intense lobbying pressure will be

focused on Congress to relax foreign policy controls on sales of weapons to Third World countries.

These controls are used to limit both the kind of

technology that can be exported or transferred, and

to designate countries that may or may not receive

U.S.-origin defense materiel.

During the 1990s, as Western Europe and Japan

become better able to satisfy their own defense

needs, sales of military equipment and related

technology transfer to Third World nations will be

an increasingly important issue. As Third World

conflicts go high-tech, U.S. defense contractors (and

the European competition) will seek to expand

foreign sales as a means of balancing reduced sales

at home. (See figures 2-3 and 2-4 on arms imports

and exports.) The risks associated with these sales

and transfers are greater because these countries are

more independent and less aligned to U.S. interests

than the countries that were the recipients of U.S.

equipment and technology transfer in the 1970s.

Clearly, the task of deciding which militarily relevant technologies may be sold to which countries is

an inherently governmental function. A policy that

permitted the sale of defense technology to the

highest bidder, without regard to nonproliferation,

arms control, or to other foreign policy considerations, would increase sales for the defense industries. Indeed, many defense executives believe that

they have lost sales to foreign competitors due to

overly restrictive, unilateral U.S. controls.

As the US. defense giants become increasingly

international in scope and operations, Congress will

have to decide what controls can and should be

maintained and/or imposed on them. This will

require a delicate balance, particularly with regard to

the European powers that are now consolidating and

concentrating their arms industries, partly to obtain

economies of scale and partly in response to the

overall economic integration of Europe pursuant to

the Single European Act. It is unlikely that U.S.

l~e *tint d~lS1~n of tie F~~d M~t~r Co. to divest i~elf of defen~ ~sets should k ~midered closely ill MS regard.
34 . Arming Our Allies: Cooperation and Competition in Defense Technology

Figure 2-3-Leading Arms Importers, 1987

Country

Czechoslovakia

Turkey

Ethiopia

Egypt

Cuba

Vietnam

Syria

India

Saudia Arabia

Iraq

3,2

0 1 2 3 4 5 6

$ billions

SOURCE: Data from Arms Control and Disarmament Agency, 1988.

allies, who have always paid more attention to the

economic aspects of armaments cooperation, will be

anxious to increase controls over the sales of their

national or regional arms industries as world demand for defense commodities diminishes.

Issue 4: The Appropriate Level of Defense

Technology

The Cold War engendered apolitical and military

stability in the West unknown throughout the first

half of the 20th century. Even if many in Congress

felt that the arms race was a dangerous and

extravagant proposition, they could not deny that the

stand-off between NATO and the Warsaw Pact had

brought peace to all of Europe for more than 40 years

and prosperity to the West. At this writing, with the

nations of the Warsaw Treaty Organization in

political disarray, and tens of thousands of protesters

demanding democracy in the streets of Moscow,

much is uncertain. At a minimum, the consensus on

the Soviet threat that supported high levels of

defense spending, as well as collaboration in defense

technology between the United States and its allies

in Europe, has begun to unravel.

Congress and the Administration face a new

political environment and new economic challenges

as they begin to address the amount and kinds of

defense technology and systems that are necessary

to ensure the future military security of the United

States and its allies. In the Cold War era, a principal

strategy of the U.S. armed forces was to counter

superior numbers of men and equipment with

superior technology. This meant that military planners generally sought to use state-of-the-art technology, and even to push the leading edge farther out by

incorporating anticipated innovations into future

weapons systems. The amount of effort needed and

the bottom line became secondary considerations.

One result was a never-ending competition in the

development and production of armaments between

the United States and the Soviet Union. Another was

a constant upward pressure on the defense budget as

the costs of high-performance, high-technology

systems escalated.20

An agreement, in principle, to reduce and limit

U.S. and Soviet troop levels in Europe has recently

been reached,21 and subsequent agreements to reach

parity in conventional armaments are now being

negotiated in Vienna. It is now at least conceivable

that the nature and extent of the preparations to meet

the Soviet threat will be determined in the future not

by an arms race, but by arms control and verification

regimes that designate the numbers and kinds of

systems to be built and deployed by the United

States, the Soviet Union, and their respective allies.

This would, of course, exert a profound influence on

international collaboration in defense technology,

because it would create a new set of governmentally

imposed constraints on the defense industries.

As Congress considers the nature of the military

capability that will be necessary in the future, the

issue of the technical sophistication of forces, units,

weapons systems, and equipment, and the associated

costs, will become increasingly important. Congress

may wish to reconsider the underlying strategy that

calls for designing next generation and even notional

technologies into weapons systems. As noted earlier, these tend to be military-specific in character,

with few or no civilian applications. It is possible

that large scale substitution of dual-use for militaryspecific technologies might ultimately undermine

the position of the United States as a military

superpower —because dual-use technologies would

be available to many nations. In time, the U.S.

military position might degenerate to the status of

first among equals.

~some a~y5t5 mwe that technological complexity is also a factor both in rising costs and in the lengthening time it tdux to get wWMPOnS into

the field.

21~e sovi~ u~on ~d tie u~t~ s~tes~ve ag~ to tit troop s@~@ in~~ EwO~ to 195,000 oneachside, with the Unitd StX~p@ttd

to maintain an additionat 30,000 troops in other parts of Europe. New York Times, Feb. 14, 1990, p. A-1.
Chapter 2-Implications and Issues for Congress ● 35

Figure 2-4-Arms Exports, Cumulative Sales, 1977-87

Country

Switzerland

China

Italy

Poland

Czechoslovakia

West Germany

United Kingdom

France

United States

USSR 224.3

1

0 100 200 300

$ billions

SOURCE: Data from Arm Control and Disarmament Agency, 1988.

Nevertheless, Congress will likely experience

unrelenting pressure to get on with the business of

peace, to collect the “peace dividend,” and to

reorient defense spending to reduce budget deficits

and to meet pressing social service, environmental,

and other domestic needs that have been neglected

over the past decade.

Issue 5: Military Dependence on Foreign

Technology

In the long run international collaboration in

defense technology generates dependence. This is

obviously the case in direct offset agreements, where

a foreign coproducer of a weapons system may

demand and receive the right to supply a particular

part or component for all future copies of a given

system. The original developer of the system would

have little reason to retain such a capacity when

rights to produce it have been given to a foreign

supplier. For many years, DoD has avoided involvement in offsets, but to little effect, because offsets

have become just one more trading chit that may be

necessary for a U.S. firm to clinch an international

deal. Beyond offsets, most forms of international

collaboration contribute to the dispersion of technical capacity, and ultimately to dependence, if for no

other reason than the U.S. company draws on the

technical expertise of its foreign partners to build the

part, component, or system in question.

A second kind of dependence arises in the context

of dual-use technology, and the global structure of

the civilian industries whose technology ultimately

ends up defense systems. As discussed previously,

these are the companies about which the U.S.

Government knows the least, but through which

much dependence has been introduced into defense

systems. OTA made substantial efforts to obtain

quantitative data regarding the amount of foreign

content in U.S. weapons systems. The government

does not maintain such data, because there is no

audit trail that penetrates much below the level of the

second tier contractors. OTA also approached several large prime contractors and was told that they do

not provide data on foreign content in specific

systems because they have no mechanism to capture

it. Several stated that it would a very costly and

difficult task, and that it would not be possible to

track the country of origin for many parts and

components.

The debate over military dependence on foreign

technology is often stated in terms of its potentially

detrimental impact on the ability to mobilize for a

prolonged war. But like many other defense issues,

foreign dependence must be cast in new terms, given

changes in the environment of defense technology,

and recent dramatic movement in political and

military relations between East and West. Logically,
it makes sense to worry about military dependence

on foreign technology when such dependence poses

a military threat, and when a nation is in a position

to do something about it. For decades, the European

powers depended on U.S. defense technology in a

way that is unacceptable and unthinkable to most

Americans. Rather than posing a threat to the

Europeans, military dependence on the United

States both enhanced European security in the near

term, and became a means of acquiring technology

that could be used to rebuild their industrial bases.

Over time, the Europeans have been able to decrease

their dependence on the United States substantially.

Using U.S. technology as a base, they learned to

build systems at home, systems that usually cost

more and were somewhat less capable than systems

available through U.S. foreign military sales programs.

The European experience teaches that there may

be some kinds of foreign dependence that can be

tolerated more easily than others. This distinction

underlies the present effort in Congress and elsewhere to identity technologies that are critical to the

military. It is closely associated with the argument

that a nation must retain R&D and industrial

capacity in certain essential technologies in order to

maintain its international trade position, and ultimately the standard of living of its population. The

military and civilian threads of this argument are, of

course, joined in the notion of dual-use technologies,

which in many cases, turn out to be critical

technologies both in defending the territorial integrity of a nation and in maintaining its economi c

vitality.

This is also the point where the relationship

between economic well-being and national security

becomes transparent. In the long term, it is unlikely

that the United States will be able to ensure its future

military security if it cannot compete in civilian

markets, markets that produce both the wealth

necessary to fired the common defense and, increasingly, the wealth necessary to conduct the R&D and

manufacture of future critical dual-use technologies.

If Congress decides to address the question of

military dependence on foreign technology, it will

first be necessary to collect data or to establish some

measures of the extent and exact nature of the

phenomenon in question. It will then be appropriate

to decide how much and what kinds of dependence

can be tolerated. The other way to approach the

problem is, as suggested above, to define critical

technological and industrial sectors that must be

maintained in the United States, both for economic

and for military reasons, and to take steps to ensure

that they are supported.

Issue 6: Technology Transfer and Security

Restrictions

Throughout the 1980s, DoD pursued a conservative policy regarding transfer of militarily relevant

technologies to foreign governments and companies. 22 It was based on the assumption that the Soviet

Union and its Warsaw Pact allies seek to acquire

Western technology to aid them in developing

modern weapons and systems, from every possible

source, using all available means. This assumption

appears less well-grounded today in light of the

political dissolution of the Warsaw Pact, and political and economic changes sweeping the Soviet

Union. 23

At this writing the Bush Administration is contemplating major policy changes in the administration of export controls, both for militarily critical and

dual-use technologies. The President has ordered a

national security review, to be carried out by the

Joint Chiefs of Staff and by the intelligence community. There is strong pressure from the U.S. business

community and from the Coordinating Committee

(COCOM)24 nations to relax controls on technology

to Eastern Europe. The U.S. strategy appears to be to

reach agreement on a small number of technologies

that must be controlled, and then rigorously enforce

that regime. Some DoD officials have expressed

concern over this plan because they believe that the

intelligence services of the Eastern European nations are still intact and in full communication with

their Soviet counterparts.

mBoth DoD and r.he Dep@mentof comme~e implemental initiatives to convince the NATO Allies to tighten export restrictions On tdMIOIOgy. They

pre,ssedforstronger administmtive controls, and for expansion of the powers of the Paris-based Coordinating Committee (COCOM). The policy objective

was to stem what some DoD oftlcials described as a hemorrhage of Western technology flowing to the East.

23Ta~olo= ~~~~ficy IMS been the subj~t of considerable debate since 1987, when a National Academy of Sciences Panel onnatio~ s~ty

export controls, cbaired by former U.S. Air Force Chief of Staff IAw Allem issued a report sharply critical of U.S. export administration policy and

practices and recommended sweeping changes in the export control process. Balancing the National Interest: U.S. National Security Export Controls

and Global Economic Competition (Washi.ngtoU DC: National Academy Press, 1987).

XCOCOM js a VohUq WY which Oversws East-West trade to ensure that Soviet and Warsaw Pact military power is not aided by tiS trade.
Chapter 2--Implications and Issues for Congress ● 37

Congress will soon address the next reauthorization of the Export Administration Act (EAA), part of

the current legislative authority for U.S. export

controls. The EAA, which has twice been amended

since its passage in 1979, is set to expire on

September 30, 1990. As Congress considers this

legislation, it will be necessary to determine whether

the statute remains adequate in the face of recent

developments and can therefore be retained or

amended without fundamental changes; or whether

substantially new policies are required to meet

changing technological, political, and economic

circumstances.

As written and administered today, export controls over technology constitute a de facto and

unintended policy to regulate the kinds and amount

of international collaboration that U.S. defense

companies may engage in. They have also inhibited

the international business prospects of U.S. civilian

companies because U.S. unilateral restrictions and

interpretations of COCOM rules are more strict than

those of other COCOM nations. Congress may

decide to limit the international activities of U.S.

defense companies, but if it does, it should do so

purposefully, and not as a side effect of other policy

goals.

Obtaining an export license for an item covered by

the Arms Export Control Act, which controls

militarily critical technologies, is a lengthy process.

All license applications must be submitted to the

Office of Munitions Control at the State Department.

In DoD, the Defense Technology Security Administration (DTSA) coordinates applications with the

Armed Services and defense agencies. While DTSA

tries to move applications rapidly through the

system, the sheer number, and multiple levels of

review, inevitably cause delays. Most large U.S.

defense contractors argue that DoD’s technology

transfer policies are biased toward protection, rather

than sharing, and taken together, constitute a major

impediment to successful industry-to-industry cooperation.

The issue of third country re-export restrictions is

particularly sensitive. When the U.S. Government

grants a license to a U.S. firm to export defense or

dual-use products, the receiving government or

company must agree to request permission from the

United States before it re-exports that product (in

any form) to a third country. This restriction is

applicable under the Arms Export Control Act and

under some provisions of the Export Administration

Act. Third-country restrictions have been a source of

irritation to allied governments and foreign companies that were forced to accept them when no other

source offered the product or the underlying technology. Many large U.S. defense contractors report,

however, that foreign governments and their industries increasingly seek non-U.S. sources for weapon

systems which have export potential in order to

circumvent restrictive U.S. Government policies.

In recent years, the defense industries, the Defense Science Board, the National Academy of

Sciences, and the Defense Policy Advisory Committee on Trade, among others, have raised technology

transfer policy as a primary issue, and have called for

a relaxation in the policy as a means to assist

international sales of defense companies, and to

make civilian, high-technology companies more

competitive. In addition to the ongoing executive

review of export controls, the National Academy of

Sciences in conducting a follow-on study to its

influential 1987 report, Balancing the National

Interest.

A new policy on export controls will have to

balance the economic concerns of U.S. companies

against U.S. foreign policy goals such as arms

control and nonproliferation of weapons of mass

destruction. In this regard, it may be necessary to

tighten controls on some strictly military technologies, and at the same time, establish a mechanism to

remove controls that damage the competitiveness of

U.S. industry. Such a policy will clearly have to be

sensitive to the differences among various allies, as

well as differences between Eastern and Western

Europe, and between Eastern Europe and the Soviet

Union.
Chapter 3

European Policies in Perspective

.
HISTORICAL PERSPECTIVE

NATIONAL INTERESTS

CONTENTS

Page

NATO PARTNERSHIP AND

**,   ** *. ***. .*. .*** .*, .*** **** .ea*O*. **** .* e*** * 41

The Spectrum of Alliance Weapons Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

The Case for Cooperation in Defense Technology . *.0******.*..**********.**,.*** 44

● ***. ... ..0* o**e*o. ..oe*. **. o.*. *.. @o ******e * 4 4

The Post-War Context **** .**. ..** *.**   ... ..**  **** *.** .*** *.*. *, *..6..***.*** 46

The Forces for Change .*** .*. * .****..,*...**.,..***..*...*..*****...,.*.***.+*. 50

CURRENT EUROPEAN PERSPECTIVES ON THE DEFENSE MARKET ..**. **.** 53

Overcapacity and Transatlantic Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

The Quest for Integration *.. *. ****..**. ...** .********.*.*.***..****.*.***.* 54

Current Policies of Key European Governments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

Boxes

Page

3-A. Forms of Collaboration *.*. *.*. ..** ..** ... ***. e**. *.. ... e.o*. ,.. o.o. *do.,.** * 45

3-B. Defense Collaboration in NATO Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50

3-C. Defense Collaboration in Non-NATO Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

3-D. Defense collaboration in Israel and the Middle East . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

3-E. Defense Collaboration With Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .57

Figures

3-1. F-16 Coproduction Component Breakdown ... .e, . b .,, . . . + . . . . + . . . . . . . . . . . . . . . . . 42

3-2. Military Expenditures as Percent of Gross Domestic Product (GDP) ..............47

3-3. Organizations of Allied Defense Collaboration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Chapter 3

European Policies in Perspective

HISTORICAL PERSPECTIVE:

NATO PARTNERSHIP AND

NATIONAL INTERESTS

The central focus of U.S. defense policy toward

Western Europe since the end of World War II has

been the preservation and strengthening of the

NATO Alliance. As this report is being prepared,

events of unprecedented magnitude are unfolding in

Eastern Europe that will profoundly affect the

post-World War II order and U.S. defense relationships with Europe. Within a period of less than a

year, the leadership has changed in Poland, Hungary, East Germany, Bulgaria, and Romania, and

movement towards democratic reform has escalated.

All this has taken place with the toleration and

perhaps even encouragement of the Soviet Union.

The dismantling of the Berlin wall, a symbol of the

40-year division of Europe into two opposed ideological camps, has opened possibilities that would

have seemed quixotic just a short time ago. These

include dramatically altered economic and political

relationships between East and West Germany,

closer economic ties between Eastern and Western

Europe and changes in the roles and perhaps

membership in NATO and the Warsaw Pact. The

meeting in December 1989 between President Bush

and President Gorbachev at Malta has accelerated

the negotiating schedule for a substantial reduction

of U.S. and Soviet forces from central Europe.

Events are now proceeding with a rapidity that is

taxing the ability of governments to promulgate

realistic and supportable policies in the area of

international armaments cooperation.

A report such as this, which deals with the design,

production, and replacement cycles of weapons

systems that are measured in decades, certainly in

some respects, will be overtaken by political events.

It is premature now to speculate on how the situation

in Eastern Europe will affect specific Western

armaments decisions. However, as a general guideline, it seems warranted to assume that the political

convulsions will be confined to Eastern Europe, and

that Western reaction to these events will be

governed to a large extent by economic and social

considerations having deep historical roots. Thus,

despite the current ferment, extrapolations based on

the underlying economic and technological forces

that have shaped U.S. weapons relations with

Western Europe may yet prove valid for a wide

range of political outcomes. Perhaps, and most

likely of all, will be an acceleration of the current

trend away from transatlantic weapons relations

based on alliance considerations to a straightforward

commercial basis.

The ways in which members of a military alliance

can meet weapons procurement needs range from

autarchy, in which each member fulfills its requirements independently, to a variety of cooperative

arrangements such as grants; direct sales; sales with

offsets; complementary weapons production; licensing; and joint research, development, and production. While these different combinations are usually

thought of as taking place within the context of

intergovernmental agreements, other forms of collaboration do exist on the private sector level, with

little or no direct governmental involvement.

U.S. relations with its European allies in weapons

production have generally followed a progression up

the collaborative scale. In the immediate post-war

era, the United States provided weapons to the Allies

on a sale basis through the Military Assistance and

Foreign Military Sales programs. Beginning in the

late 1950s, as the Europeans recovered their industrial capacities, the demand arose for coproduction

of portions of U.S. weapons systems in Europe.

Accordingly, the United States shifted from direct

military sales to licensing, with the F-104 aircraft

and the HAWK air defense system being the first

major examples of coproduction. The largest coproduction program within NATO to date has been the

F-16 fighter aircraft. This involves a complex

multi-nation arrangement of joint production, sales,

offsets, and sharing of third country markets—

initially valued at $2.8 billion (see figure 3-1 for the

contribution of different nations). During the past

decade, the United States has licensed or entered into

government-to-government coproduction agreements

with 17 countries, including 7 NATO members, with

-41–
42 ● Arming Our Allies: Cooperation and Competition in Defense Technology

Figure 3-1-F-16 Coproduction Component Breakdown

Nose landing

Netherlands ‘ear 7

u s

\

Inlet

Greece

Israel

us

u s Center

/

fuselage

Netherlands

South Korea

Main landing gear

Netherlands T

u s

I

I

Main landing

gear doors

Indonesia

Netherlands

u s

SOURCE: General Dynamics.
Chapter 3--European Policies in Perspective . 43

Rudder seals

~L/ &~ Tail hook

Engine access

door build up us

~-

Weapons pylons

Denmark

us \\ I

-.

Israel 370/300 gal

u s fuel tanks

Israel
a total current estimated value of $24.2 billion.1

Appendixes B and C give a more detailed view of the

modalities of collaboration.

As European scientific and technological capabilities reached U.S. levels, the emphasis has more

recently shifted from coproduction to codevelopment, with the major collaborative impetus coming

from industry rather than government. This is

particularly true within Europe, where a significant

proportion of major new weapons systems, such as

the European Fighter Aircraft, now involve technology collaboration between two or more countries.

U.S. Government interest in expanded transatlantic

cooperation in defense technology R&D is evidenced by the 1986 Nunn-Roth-Warner amendment,

although results to date indicate this is more difficult

to arrange than intra-European collaboration.2

European and American defense analysts have

traditionally agreed about the desirability of increased cooperation in defense technology. The

current disarray in the Warsaw Pact leads to a

sharply reduced threat perception, while concurrently Western governments are under pressure to

provide increased economic assistance to Eastern

Europe. Both factors will tend to accelerate the

decrease in Western defense spending. Yet, at the

same time, the increasing sophistication of weapons

systems demands ever higher investments in research and development. The resultant high per unit

cost of weapons systems and consequently decreased ability of NATO governments to purchase

sufficient numbers to meet projected forces requirements, risks so-called ‘‘structural disarmament.

Collaboration provides one answer to this dilemma

in theory by reducing duplicative R&D and achieving economies of scale through longer production

runs. It also provides for a more robust and

cost-effective Alliance defense through standardization and improved interoperability. This, of course,

presents the argument in a somewhat idealized form.

NATO collaborative projects have generally required lengthy negotiations and complex management systems, which increase costs in relation to the

number of participating countries. While there is no

established, accurate method of matching collaborative costs against savings resulting from elimination

of duplication of weapons systems, the assumption

that cooperation provides the greater overall benefit

has rarely been challenged.

In actual practice, however, the NATO Alliance

has fallen far short of this ideal. For political and

economic reasons the United States and, to varying

degrees, Germany, the United Kingdom, and France,

have usually practiced autonomous weapons systems development. The resultant duplication of

effort and nonstandardization of even such basic

items as fuel and ammunition is widely decried by

defense experts and has significantly reduced NATO

weapons deployments. Nevertheless, duplication

does not appear to be diminishing. A recent survey

of U.S. and European weapons systems under

development identifies, for example, 16 U.S. and 26

European tactical aircraft, 33 U.S. and 38 European

tactical missiles, and 18 U.S. and 20 European

helicopters.3

For the smaller NATO countries, which lack the

technological infrastructure to produce entire weapons systems, the options are limited to direct

purchase or coproduction arrangements. Coproduction usually results in much higher per unit costs;

however, the desire to provide for domestic employment, protect trade balances, and other nondefense

considerations usually lead these countries to prefer

it to direct purchases.

Collaboration in defense technology, as opposed

to licensing or coproduction arrangements, should

be a more effective form of weapons cooperation

between the United States and its NATO allies of

roughly equal technological capabilities, since collaboration shares costs and reduces duplication. It is

l~e tow ~m fiscal years 1977 through 1988 for the NATO countries are: ~~y-$4,309 millioq GreecM199 mi.llioq Italy-$71 millioq

Spain-$578 rnilliou llrkey-$0.3 mill.iou and U.K.-$ I,55O million. Source: Defense Security Assistance Agency.

%Kopcan reluctance to enter into technology collaboration with the United States is not a new phenomenon. For example, a 1980 study on NATO

tactical missile prcgrarns indicates that the Europeans will accept elaboration with the United States only if it: a) is based on European participation

as an equal partmz; b) does not interfere with intra-Eumpeancooperatiow c) involves increased direct purchase by the United States of Eumpeansystems,

or at least adoption by the United States of such systems through the use of licenses; and d) docs not interfere with sales to third countries. Herschel E.

Kanter and Joh N. FIY, Cooperation in Development and Production of NATO Weapons (Alexandrk VA: Institute for Defense AnaIyses, December

1980), p. S-9.

s~~sm~ of~joru.s.,E~o~Def~se, Aerospamh-,” Aviation Week and Space Technology, VO1. IZ No. 12, ~. 19, 19$0 W. z@s7.
Chapter 3--European Policies in Perspective ● 45

During the 1960s and 1970s, when the Foreign Military Sales (FMS) program was at its peak, U.S. industrial

strategies for defense exports were simple: companies either manufactured equipment to be sold by the U.S.

Government under the FMS program or they supported U.S. Government coproduction and licensed production

policies on selected weapons systems, Through FMS programs, U.S. industry set up support teams in foreign

countries to assist in installing, training, operating, and maintaining U.S.-origin equipment. In general, U.S.

companies assisted foreign companies so that they could in turn support their own governments. These activities

rarely led to lasting business relationships. It was in the commercial and space markets where U.S. and foreign

companies began to establish a more equal basis for collaboration.

Throughout the 1980s, industry-to-industry collaboration grew in importance. The simplest form of

industry-to-industry collaboration is teaming. One company (usually based in the sponsoring country) serves as the

lead and prime contractor. The other team members function as subcontractors who participate in the program in

a predetermined way. Tearning is standard practice in the U.S. defense marketplace, and is used by prime contractors

to lockup critical subcontracting resources during competitive bids. In fact, teaming is so widely used in the United

States that defense contractors often find themselves on competing teams for one program and on the same team

for another.

Most European companies have not favored program-by-program teaming. Instead, they have sought to

establish long-term, management-level relationships with firms with complementary technologies, product lines,

or markets, using these associations as a basis to pursue a range of similar market opportunities. This has led to an

emphasis in Europe on formal strategic company-to-company agreements or alliances. This concept of banding

together to pursue expensive and long-term development programs has become commonplace and a consortium or

joint venture is often the formal mechanism.

Whereas a teaming agreement is a prime contractor-subcontractor relationship operating under existing

corporate structures, a consortium usually assumes an organizational form of its own, often with a board of directors

comprised of the member companies to oversee activities, a lead program manager, and integrated technical and

support teams. Consortia can be directed toward multiple business opportunities or a single one. Several have been

formed to pursue cooperative programs funded under the Nunn amendment.

A joint venture is a separate corporate entity established by the participating companies and operated as an

independent body. Joint ventures represent a greater corporate resource commitment than simple teaming or

consortia because the new company must be financed and helped to grow, over an extended period. While a

joint-venture company may look to the parent companies for most resources, it can also go outside to acquire goods

and services, which may be available on better terms. Joint ventures are almost always set up to pursue broad

business areas, but their objectives and structures are flexible. These companies can concentrate on marketing, joint

R&D activities or manufacturing, or a combination.

Until recently, banding together was relatively unfamiliar to U.S. industry. However, major U.S. companies

are beginning to seek collaboration in key technologies. Much attention has been paid to SEMATECH, the

DoD-industry consortium to develop microelectronic manufacturing technologies, although there are some earlier

examples, such as the Electric Power Research Institute (EPRI), the Semiconductor Research Cooperative (SRS),

the Council on Chemical Research, the University Steel Resources Center, and the Microelectronics and Computer

Corp. (MCC). The trend toward collaboration on a national scale has been aided by a relaxed U.S. Government

attitude regarding the anti-trust implications of joint ventures in advanced technology and by the obvious success

of such ventures in Japan and Europe.

The ultimate joint venture is an acquisition or merger. Since the mid-1980s, an increasing number of U.S.

defense and high-technology firms appear to have been acquired by foreign concerns. While Japanese investment

in the United States has been closely watched, in fact, U.K. investments in the U.S. defense sector have been greater.

As the pace of these acquisitions has increased, foreign ownership has become an increasingly important issue with

Congress and with DoD.

On the other hand, U.S. companies have not moved as aggressively to acquire companies in Europe or in the

Pacific Rim. This is in part because these governments historically restrict foreign takeovers of their defense and

high-technology firms. Although cross-border mergers and acquisitions are becoming more commonplace in
46 ● Arming Our Allies: Cooperation and Competition in Defense Technology

Europe pursuant to the Single European Act, takeovers by U.S. firms are still viewed with caution. U.S. acquisitions

in Japan are even more difficult to achieve.

There are other barriers to foreign acquisitions by U.S. defense firms. For example, in such ventures the long

view must be taken in terms of sales and profits, but U.S. companies seldom see individual foreign markets as

sufficiently large to warrant tying up capital or taking undue financial risks. Consortia or joint ventures appear to

be favored by U.S. companies to achieve a presence in foreign markets.

Depending on goals and market strategies, a company can use a variety of other techniques to facilitate

industrial cooperation and increase exports. For mature products, for example, product licensing and cross-licensing

techniques are common. In these a foreign firm is provided with a design and/or production package and the

authority to produce and sell U.S.-developed products (or vice versa). Revenue sharing and technical assistance

agreements are also used.

also the most difficult to arrange, because it impinges directly on the partners’ defense, foreign

policy, and economic interests. Collaboration is

consequently easiest to initiate among nations whose

broad interests are most nearly congruent.

U.S. alliance relationships with Europe can be

envisioned as encompassing a range of mutual

understandings. At the fundamental level, there is

the common agreement that Western Europe should

not fall under Soviet military domination. The

durability of the NATO Alliance attests to the

unquestioned transatlantic accord on this basic

political purpose. On the next level is the issue of the

direct economic costs of supporting the Alliance.

Here there is considerably less agreement between

the United States and Europe and, indeed, among the

Europeans themselves. The “burdensharing” debate over what each member country should contribute has been a chronic problem for NATO, but has

not caused a serious transatlantic rift. U.S. urging for

increased European defense spending has never

been rejected outright, but rather subsumed in

promises by European Political leaders as goals to be

achieved in the future. Further, some NATO countries, such as the United Kingdom and Turkey,

actually do achieve percentages of gross national

product (GNP) defense spending that approach that

of the United States (see figure 3-2). At the third

level is the issue of how overall economic policy

relates to defense policy. Here the differences

between Europe and the United States are the most

pronounced. In this regard, unilateral U.S. economic

sanctions and trade policies have, at times, left the

United States entirely isolated within NATO, creating suspicions that have never been fully resolved

and creating a continuing residue of mutual suspicion. 4

Added to the differences in policy comes the issue

of the sheer size of defense outlays. U.S. annual

spending on defense R&D, for example, equals the

entire budget for the Bundeswehr. This disproportion has the effect in the United States of creating a

high degree of insularity, while instilling in European governments and industry the feeling that they

either must join forces or be swallowed by the U.S.

defense industrial effort. It is therefore not surprising

that collaborative programs in defense technology,

which affect wide and sensitive sectors in each

nation’s economy, are advancing more rapidly

among the Europeans than with the United States,

despite the impetus of the Nunn-Roth Amendment.

A further understanding of this phenomenon maybe

found in comparing how differences in historical

experience have shaped perceptions of national

interest in the United States and in Europe, especially at the critical intersection of economic and

defense policy.

The Post-War Context

United States

The United States emerged at the end of World

War II as the world’s preeminent military and

industrial power. The United States was willing and

able to give generous assistance, exemplified by the

%xamph include W 1979 declaration of U.S. economic sanctions against the Soviet Union following the invasion of &uinistq which &

Europeans undereut with sales of agricultural and industrial goods, and European commencement of the the Siberian gas pipeline over U.S. objections,

including unauthorized re-export of U.S. technology during the 1981-82 Polish crisis. For their pm the Europeans accused the United States of

attempting to use sanctions to obtain commercial advantage.
Chapter 3--European Policies in Perspective ● 47

Figure 3-2—Military Expenditures as Percent of Gross Domestic Product (GDP)

7

1

United States

6

1

/ United Kingdom

%. GDP

5-

4 -

3 -

2 -

1 -

France

+

West Germanv

,

Netherlands

Spai n Italy

w

Japan n

+

t

o

I

[ I 1 I

f

1980 1982 1984 1986 1988

Year

SOURCE: Data from Arms Control and Disarmament Agency, 1988.

Marshall Plan, to its European allies and former

adversaries in helping to rebuild their war-ravaged

economies and provide for their defense. At home,

Americans perceived little need for government

intervention in the civilian economic sphere beyond

regulation and social welfare, and governmentindustry relations reverted in the United States to the

distant and quasi-antagonistic pre-war posture. The

major challenge the United States faced was the

military threat posed by the Soviet Union, which

refused to enter a post-war settlement and appeared

to menace Western Europe and other regions. As a

consequence, during the next 30 years, the United

States fought two major wars and engaged in

numerous smaller conflicts to combat the expansionism of the Soviets and their proxies and allies.

As a hegemonic power in the immediate postWorld War II decades, the United States did not

differentiate its economic and defense policies

toward Europe. The United States considered European economic growth and steps toward economic

integration both as good in themselves and as

bolstering NATO defense capacities. As long as the

U.S. trade and fiscal situation remained reasonably

balanced, the economic implications of U.S. defense

commitments to Europe were of secondary importance. During this period, the United States sold

weapons and weapons systems to its European

partners at bargain prices, and readily acceded to

European demands for coproduction and offset

arrangements that reduced its balance of trade

credits. It was not until the early 1980s, when the

U.S. current account and manufacturing trade balances went into precipitous decline, that national

attention focused on the economic side of the

defense equation. Since then, there has been increasing concern that structural weaknesses in the U.S.

manufacturing sector will undercut the maintenance

of a first-class indigenous defense industry, and that

the civilian economy and manufacturing base may

be unable to support general governmental defense

expenditures at current levels.5

The DoD is undertaking programs to support U.S.

competitiveness in critical dual-use technologies

such as Very High Speed Integrated Circuits and

High Definition Television, yet many question

5s= us. conw~s, CM= of T=&oIo~ Ass~~ent, Hokiing the EUge: Maintaining the Dtfense ltis~ial Base, o~-~sc~zo ~~~to%

DC: U.S. Government Printing Office. April 1989); and U.S. Congress, Office of Technology Assessment, Paying the Bill: Man@actunng & America’s

Trade Dejieit, OTA-ITE-390 (Washington DC: U.S. Government Printing Oftlce, June 1988), for comprehensive discussions of the defense and civilian

sector aspects of these issues.
whether defense R&D can or should continue to

serve as a spur to the civilian economy. The need for

increased U.S. export performance is universally

accepted, but export control legislation considered

disadvantageous to U.S. industry is allowed to

remain on the books. The need to trim fiscal and

current account deficits is likewise accepted, but the

United States has not reduced significantly its

foreign military commitments, including an estimated $150 billion annual outlay for NATO.6 At

present no consensus has formed to adjust national

policies to current economic or political conditions.

Europe

World War II left the European industrial base in

ruins. The European imperial powers, France and the

United Kingdom, were stripped of their colonies.

Germany, the major continental power, lost its

eastern provinces and the remainder was divided

between East and West. Collectively and individually there was neither the will nor the ability to

project international political influence. Europe

gladly accepted U.S. military protection and turned

its full attention to the restoration of its economy.

Government assistance and protection in the process

of economic restoration were considered essential.

Many industries were nationalized or otherwise

established close ties to government. The Europeans

recognized that intra-European cooperation was

required for full economic recovery. The post-World

War II history of Europe reveals a steady progression of economic cooperation from the European

Coal and Steel Community, to the European Economic Community, to preparations for integration in

1992 under the Single Europe Act. European defense concerns remain substantially confined to the

European continent.

The European approach to weapons procurement

has been strongly influenced by economic considerations since the inception of NATO in 1949. Matters

of domestic employment, export markets, civilian

research and technology, and balance of payments

have usually taken precedence over strictly defense

concerns. The Europeans have been willing to pay a

considerable premium in lessened defense capacity,

or absorb higher costs, for the benefits of domestic

production on the rationale that, as democracies,

they would lose public support for defense efforts

resulting in a net loss of employment. Thus,

beginning in the late 1950s, the Europeans have

opted for coproduction arrangements rather than

weapons purchases from the United States, have

demanded offsets for what purchases they do make,

and have initiated duplicative and competing weapons programs when they achieved the requisite

technological capacity.

In distinction to the traditional U.S. attitude that

European progress in the civilian economy and

defense sectors is equally desirable and valuable,

European attitudes vis-á-vis the United States have

been more nuanced. In European eyes, the United

States is seen as a strategic ally, but also as a

formidable economic competitor whose dominance

in NATO, if not opposed, could lead to permanent .

European technological inferiority. Even while the

technology gap rapidly narrows, the Europeans still

perceive that the United States will retain its

competitive advantage in defense production due to

the economies of scale afforded by its huge domestic

market. This perception is the driving force behind

the integration of national defense programs and the

creation of intra-European strategic alliances in

defense production. The Europeans are bolstered in

this effort by their experience in governmentsponsored cooperation with the Airbus and commercial space programs, which have made wide inroads

into markets hitherto dominated by U.S. industry.

The present situation requires that the Europeans

balance carefully their economic and defense relationships with the United States, being sufficiently

cooperative to deprive the United States of an excuse

for a reduction of support for NATO, while at the

same time pursuing common economic policies that

are specifically designed to compete with U.S.

interests.

NATO

At the founding of NATO, it was immediately

apparent that economic and social conditions in

Western Europe made it impossible to match the

formidable Soviet advantage in conventional weapons. Defense policy and strategy thus centered on the

threat of U.S. nuclear retaliation to deter a Soviet

attack on NATO. The credibility of the U.S. strategic

nuclear deterrent came under question when the

Soviets achieved strategic nuclear parity. The NATO

solution was the doctrine of “Flexible Response. ’

6s~ us, co~~s, House b~ Senices Committee, Report of the Defense Burdensharing panel, Au~t 1988* P. 12.
Chapter 3--European Policies in Perspective ● 49

The question of how much conventional defense

is enough has been a continual matter of contention

between the United States and the Europeans. The

United States has consistently urged that NATO

provide a conventional defense sufficient to deter a

Soviet conventional attack while underlining the

threat of nuclear escalation. The United States

stations large numbers of forces in Europe for this

purpose. The NATO Allies have not been very

responsive to U.S. pressure because of the increased

cost to them of conventional defense, and for

strategic reasons. The Europeans argue that their

patterns of defense spending, which was initially

constrained by economic weakness, are now set and

it is politically impossible for governments to raise

them, absent a significant change in public perception of the Soviet threat. The Europeans have also

questioned the strategic desirability of a conventional force equally matched to the Warsaw Pact,

which may tend to de-link the U.S. strategic

deterrent. Current political developments in Eastern

Europe and the Soviet Union, and conventional

force reduction agreements, may rapidly alter these

basic perceptions. But for the present at least, the

Allies appear to value the presence of the U.S. force

in Europe more in terms of a guarantee of U.S.

strategic linkage than for its war-fighting potential.

In theory, NATO headquarters should serve as the

locus of cooperation to ensure that the forces of

member countries are appropriately equipped, including standardization and interoperability of weapons systems, to perform assigned defensive tasks.

NATO has developed an extensive coordinative

mechanism for this purpose, headed by the Conference of National Armaments Directors (CNAD).

However, NATO Headquarters has only the power

to make recommendations to member governments

and, in practice, has been only marginally successful

in obtaining compliance. The chief reason is that the

Allies have been reluctant to have an overly effective

standardization program, which they fear would be

based on generally cheaper and more effective U.S.

weapons systems.

The Europeans have therefore preferred frost to

hold weapons coordination and standardization discussions among themselves, before facing the United

States at the CNAD. These consultations take place

within the Eurogroup, which is formally associated

with NATO, and perhaps now more importantly in

the Independent European Program Group (IEPG)

(discussed below) which is independent of NATO.

The Europeans have denied a U.S. request to

monitor meetings of the IEPG, noting that Europeans are not privy to DoD procurement deliberations.

(Figure 3-3 shows the membership of the principal

organizations involved in international defense collaboration.)

Proliferation of nonstandardized weapons has

been decried by a succession of both U.S. and

European NATO commanders, and according to

some war-game scenarios, the factor of weapons

standardization could make the difference between

victory and defeat for NATO. However, these

admonitions have not been sufficiently convincing

to change current NATO practice.

Asymmetries in U.S. and European Perspectives

It is remarkable, in view of the global changes that

have occurred since the end of World War II and

onset of the Cold War, how little the perceptions of

national interest have altered on both sides of the

Atlantic. Concern about the long-term health of the

U.S. economy has risen in the past decade, and more

recently there has been a greatly reduced perception

of the Soviet threat, but U.S. governmental expenditure, organization, and policy still largely reflect

Cold War perspectives. While Americans are generally taxed at lower rates than their European

counterparts, the great preponderance of discretionary Federal spending is devoted to defense. The

Europeans pay less, in total and per capita, for

defense and more for social welfare and the civilian

economy. U.S. Federal R&D spending is centered in

the military sector, European governmental R&D is

civilian oriented.

The United States views NATO cohesion as the

linchpin of its relations towards Europe, while the

Europeans seem more apt to subordinate defense

concerns to matters of economic stability and

growth. The United States has an extensive apparatus for the licensing and control of militarily

sensitive technology and is relatively light on

governmental export promotion mechanisms, while

the reverse is true in Europe. The United States has

a tendency to see the Third World as apolitical arena

for competing ideologies, the Europeans see it as a

source of raw materials and an export market. These

assymetries are evident in the overall statistics: with

a combined population and GNP that now exceeds

that of the United States, Europe’s defense spending

is less than 50 percent, its procurement budget is 40
Since its inception in the mid- l960s, NATO armaments cooperation focused largely on the activities of the

Conference of National Armaments Directors (CNAD), a senior body reporting to the North Atlantic Council,

NATO’s top political organization (see app. A). Until the mid-1980s, international collaboration in defense

technology and NATO armaments cooperation were essentially congruent.

About 200 groups, subgroups, ad-hoc groups, information exchange groups, cadre groups, and working parties

are organized under CNAD, with each addressing some aspect of collaboration in defense equipment. Each group

is supported by one or more U.S. delegates. The work of CNAD groups ranges from attempts to harmonize national

acquisition policies, to prefeasibility (or concept formulation) studies on new weapons, to applications of advanced

technologies to future military needs.

The CNAD is criticized for being too complex. Because CNAD bodies face such complicated issues, however,

it is not surprising that such a structure has resulted. But CNAD’s complexity discourages DoD officials from

pursuing cooperative activities in NATO. They prefer, instead, to use smaller and more manageable fora. However,

unlike other NATO bodies, CNAD decisions do not require unanimity. If they agree on a course of action, any two

or more nations can proceed with NATO’s blessing. The fact that no single nation can veto a cooperative program

is an often overlooked strength of the CNAD. Once an agreement to cooperate is reached in principle, participating

nations negotiate agreements, sign contracts, and get programs underway — all outside NATO. Government-to

government collaborative programs funded under the Nunn amendment have also developed this way. As noted in

app. B, the first of these proposals was presented at a special CNAD meeting in 1986.

Other mechanisms are used to promote transatlantic collaborative programs as well, including the so-called

Four-Power meetings between the United States, the United Kingdom, West Germany, and France. The National

Armament Directors from these four nations meet at least twice yearly (as do their deputies) to discuss a range of

topics, often in preparation for introduction into NATO. The military departments also have four-power and bilateral

meetings at the level of the Service National Representative, generally the top-level uniformed R&D official from

each nation. Firm agreements on collaborative programs can result from these meetings, which often serve to

coordinate positions for upcoming NATO meetings.

percent, and its defense R&D expenditure is less The Forces for Change

than 20 percent of that of the United States

—

Western Europe Achieves Economic Parity

Despite markedly different transatlantic perceptions With the United States

of global interest, NATO has been until now a

singularly stable and successful enterprise. Since its

founding, it has suffered only one major setback, the

withdrawal of France from NATO’s integrated

military structure in 1967. The Alliance nations have

generally prospered, although some more than

others. Open ruptures in NATO have been skillfully

avoided, perhaps primarily because the emphasis on

deterrence rather than war-fighting capacity allowed

great flexibility in deciding acceptable levels of

contributions by the member states to mutual

defense. Yet the underlying tensions among the

Alliance partners remains, and economic, political,

and technological developments over the past years

and months auger some realignment of U.S. defense

relationships with Europe. The recent wave of

democratic movements in Eastern Europe appears

likely to accelerate the process.

During the past two decades most traces of former

European economic and industrial dependence on

the United States have disappeared. The balance of

trade now favors the Europeans, and other economic

indicators such as per capita incomes, levels of

European investment in the United States, numbers

of patents issued, etc., all point to the fact that the era

of U.S. supremacy has passed. The forthcoming

economic integration of Europe in 1992 under the

Single European Act promises to expand further

European economic prowess vis-à-vis the United

States.

These developments have exacerbated the issue of

“burdensharing," i.e., the appropriate level of U.S.

support for NATO relative to European contributions. In the United States there is considerable and

growing sentiment for a reduction of U.S. forces

stationed in Europe, particularly if the Europeans do

not raise the level of their defense expenditures. On
Chapter 3--European Policies in Perspective . 51

Nation

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Belgium

Denmark

France

West Germany

Greece

Iceland

Italy

Luxembourg

Netherlands

Norway

Portugal

Spare

Turkey

U.K.

U.S.

Canada

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Functions

Figure 3-3-Organizations of Allied Defense Collaboration

North

AtIantic

Treat y

Organization

Conference

of National

Armaments

Directors

European

Economic

Community

Western

European

Union

\/

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

•Western

Europe’s link

to u.s.

“Coordinates

Allied military

forces

Independent

European

Programme

Group

NATO I

CNAD I Euro Group I EEC I WEU I

IEPG

4

\/

4

d

d

d

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

•Part of NATO

“Structure for

military R&D

and

production

“Harmonize

operational

concepts,

weapons

production &

logistics

● ommon

economic

market

● NO explicit

defense role

“Defense role

through dualuse and R&D

programs

● Inner group of

European

nations

•Focus on

cooperation

in defense

production

•Works within

NATO

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

“Central arms

organization

for European

nations

“Negotiates

collectively

with U.S. on

defense

Industrial

activities

“Exploits

European

technol–

ogical

resources

“Eliminates

crossnational

barriers

“Sponsors

EUCLID

defense R&D

program

SOURCE: Office of Technology Assessment, 1990.
Cooperation with non-NATO European countries is concentrated on Sweden and Switzerland.

Coproduction agreements with Sweden permitted

the Swedes to manufacture U.S.-designed equipment after WWII. Subsequently, the United States

has purchased a few Swedish-designed and built

weapons. Recently under the Foreign Weapons

Evaluation program, Swedish equipment has fared

well, although only nominal procurements have

taken place to date. U.S./Swiss cooperation remains

at a low level, but the recent Swiss decision to

purchase F/A-18 fighters may generate increased

cooperation. The Austrians have shown interest in

working with the United States, and the U.S. Army

has purchased some Austrian wheeled vehicles, and

has included Austrian firms in competitions for

some Army developments. More recently, the Finns

have been working with DoD and the State Department to develop a mechanism for cooperation with

the United States.

the European side there is concern about the

willingness and ability of the United States to

maintain its current level of support for NATO. As

one European observer put it: “How long can we

expect 260 million Americans to defend 320 million

Europeans from 280 million Soviets?’

The burdensharing issue and the economic tensions it expresses have a depressing effect on the

prospects for transatlantic weapons collaboration, as

governments and private industry become wary of

making heavy investments in joint projects that may

be abruptly canceled by limitations on funding. The

past year has witnessed a significant number of

cancellations or national withdrawals on economic

grounds from cooperative NATO projects involving

the United States.8

Perceived Decline of the Soviet Threat

With the accession of Soviet President Gorbachev

and the Soviet withdrawal from Afghanistan, Western perceptions of the Warsaw Pact threat to NATO

have undergone rapid evolution. The election of

democratic governments in Poland, Hungary, Czechoslovakia, East Germany, Bulgaria, and the economic and political turmoil in the Soviet Union itself

have contributed to the assessment that the Soviet

threat is eroding. Gorbachev’s announcement of cuts

in the Soviet defense budget, unilateral force reductions, and apparently more flexible positions regarding nuclear, conventional, and chemical weapons

negotiations have added further credibility to the

notion of a more peaceful Soviet orientation. The

U.S./Soviet summit scheduled for 1990 appears

likely to result in agreement for the reduction of

substantial mutual reduction of forces in Europe.

While Gorbachev’s initiatives have been warmly

greeted on both sides of the Atlantic, there is the

possibility of a substantial split of U.S. and European views concerning their ultimate significance.

At this writing the Europeans appear somewhat

more ready than the United States to accept Soviet

reforms as irreversible and proceed with economic

assistance to Eastern Europe and increased trade

with the Soviets. The United States is not prepared

to overlook continued Soviet military aid to Nicaragua, Afghanistan, and other areas of regional

conflict. A serious rift in the Alliance could develop

if, for example, there is a failure in arms control

negotiations or in the event of a Soviet-backed

military crack-down in Eastern Europe or the Baltic

states.

From the European viewpoint, balanced U. S./

Soviet arms control agreements and force reductions

are highly desirable politically, but may entail some

undesirable economic consequences. Apart from the

reduction of direct U.S. payments for the support of

its forces in Europe (West Germany alone receives

approximately $6 billion annually for this purpose)

the Europeans worry about the effect on their

domestic markets of U.S. defense production overcapacity. There also may be some concern about

U.S. or Soviet “free sales” in Third World markets

of weapons withdrawn from Europe under arms

control agreements.

Perestroika and the events in Eastern Europe in

late 1989 appear to have sharply accelerated declines

in NATO defense spending. Managing coordinated

and equitable reductions may prove a difficult and

7J@.pieme B~hta, S=mq of & &fe~ co@tt~ of the French Parliament. Quoted in Cook and GilmoI& ~’w’a~~ u E~owan pillar

(w@@Oo% DC: Center for Strategic and International Studies, November 1988), p. 5.

%ese include U.S. and British withdrawal km the modular stand-off weapon (MSOW), West German withdrawal from the advanced shofi-range

air-to-air missiie (ASRAAM), West German withdrawal from the NATO Multifunction Information Distribution System, and Briti~ Frencb and Italian

withdrawal from the NATO Frigate Replacement for the 1990s (NFR-90). “Tight Budgets, Design Conflicts Undercut NATO Weapons I%ojects,”

Aviation Week and Space Technology, Sept. 25, 1989, vol. 11, No. 39, pp, 18-19.
Chapter 3--European Policies in Perspective ● 53

contentious issue within the Alliance. In December,

1989, the United States announced a 2 percent

reduction in defense spending, while at the same

time West Germany indicated plans for a 20 percent

reduction in the Bundeswehr.

High Technology and Global Industrialization

The past several decades have witnessed a steep

rise in international trade and a world-wide revolution in manufacturing processes. The computer and

associated electronics have become major factors in

practically all aspects of production, with a versatility that blurs the distinction between civilian and

military applications. Moreover, these technologies

have spread from the United States to Europe, Japan,

and the newly industrialized countries in Asia. Most

of the dynamism in computers and electronics has

been due to vigorous growth in the civilian market.

Thus, in contrast to the immediate post-war era, the

military sector has now lost much of its dominance

as the focus of high-tech innovation, and in many

areas is becoming a net importer of civilian R&D. At

the same time, manufacturing is losing some of its

national character, with research and development

for a given product taking place in one set of

countries, manufacturing of components in others,

and final assembly and marketing in still others.

These factors are forcing a change in U.S. and

European thinking about weapons production.

The question of how to maintain the requisite

degree of national defense sovereignty in the face of

these trends is acutely felt in the United States and

Europe, but the reactions to these developments

have been different. In the United States, governmental efforts remain centered on military programs

to keep the United States abreast of leading edge

dual-use technologies. There are also a wide variety

of proposals to strengthen the U.S. defense technology base through improved DoD acquisition and

R&D management, but significantly there is no

consensus on how to stop or even slow the erosion

of the civilian R&D base. Europe, on the other hand,

has taken up this challenge in the mid-1980s by

spurring intra-European civilian R&D collaboration

through such programs as BRITE, EUREKA, ESPRIT and RACE,9 which to some extent mirror

DoD’s programs. There is also a move toward

improved intra-European weapons production collaboration through the IEPG, and a reorganization of

European defense industries.10

CURRENT EUROPEAN

PERSPECTIVES ON THE

DEFENSE MARKET

Overcapacity and Transatlantic Competition

Real defense spending in NATO Europe has

declined for the past 5 years and, without a sharp

reversal in current Soviet behavior, the outlook for

U.S. and European defense procurement spending

remains bleak. European weapons suppliers and

ministries of defense have felt the pinch of constrained budgets and are grappling with the economic and defense implications of increasing weapons production overcapacity. Compounding the

problem is the question of export sales to third

countries. European weapons manufacturers are

much more dependent than their U.S. counterparts

on exports (64 percent v. 24 percent of total

production) and had until the past several years

enjoyed a healthy $20 billion per year surplus in

third-country weapons sales. However, rampant

Third World debt, the ending of the Iran-Iraq war,

and declining OPEC surpluses have served to

constrain this market as well.

European governments and industry perceive that

U.S. producers will be similarly affected by the

market decline, and their anxiety has increased about

the intentions of U.S. industry to penetrate the

European domestic market and compete more vigorously in the Third World. Europe has long felt that

U.S. producers wield formidable competitive advantages in terms of scale: the total European procurement market amounts to only 40 percent of the U.S.

domestic market, and the United States enjoys a

five-to-one advantage in direct defense R&D spending.

%asic Research into Industry Technology forlh.rope (BRITE) was initiated in 1985 to foster cooperation in abroad range of precompetitiveadvanced

technologies with good industrial potential. European Research Coordinating Agency (EUREKA) covers the same ground as BIUTE, but was launched

by France in 1985 specifically to counter the U.S. invitation for European cooperation on SDI research. European Strategic Program for Research in

Information Technology (ESPRIT) started in 1985 and is concerned solely with precompetitive information technologies. Research and Development

in Advanced Communications for Europe (RACE) started in 1986 to lay the foundation for a Europe-wide fiber optic communications system.

l~e Gener~~co~@ ~w is Presently S~@@this ~~er for the House ~~s~i~s Committ&, See U. S. Congress, General AOX)unting

Office, “EC 92 and the Defense Trade and Cooperation” (in process).
Europe is also worried about the indirect threat to

their defense markets posed by Japan. The Japanese

are well positioned to buy into or acquire European

civilian electronics firms and use these as a base to

replace traditional European-owned and -operated

defense suppliers.

In this sharply competitive environment, the

Europeans place a very high priority on retaining

access to the U.S. defense market. Despite some

recent successes, such as the $4 billion sale by

France and Belgium of the RITA (Mobil Subscriber

Equipment) battlefield communications system to

the U.S. Army, the NATO Allies believe that the

time for large government-to-government sales has

passed. Thus, the approach now favored is transatlantic industrial teaming, which permits European

firms to enter the U.S. market on a subcontractor

basis, and the direct acquisition of U.S. defense

suppliers. These private sector activities have been

strongly encouraged by the Reagan and Bush

administrations’ free trade policies, which Congress

has been reluctant to challenge.

DoD lacks systematic and timely information on

foreign subcontractor sales as well as on foreign

ownership of U.S.-based contractors and subcontractors, hence the full extent of European

penetration of the U.S. defense industrial base is

uncertain. However, there appears to be a dramatic

increase in foreign takeovers of U.S. defense suppliers in the past decade. According to one study, 11

defense firms were acquired by foreign concerns in

1983, while in just the first half of 1988 alone there

were 37 such acquisitions.11 The 1988 Exon-Florio

Amendment gave the president the power to block

such takeovers on national security grounds. In the

first test of the amendment, the president declined in

February 1989 to exercise this authority to block

acquisition of the last major U.S. supplier of silicon

wafers by a West German firm. The amendment has

been used recently to attempt to force the Chinese to

sell back to a U.S. company an electronics firm they

bought in mid-1989.

TThe The European response to the U.S. and Japanese

challenges in the civilian and defense spheres has

been an accelerated trend toward economic and

industrial integration to protect the domestic market.

The efforts of European governments have focused

on the creation of supra-national alliances in the

civilian sector under the Single European Act, and in

the defense sector through the Independent European Programme Group. While the economic and

market impact of these developments will not be

obvious in the immediate future, the European

defense industry is already undergoing substantial

consolidation through mergers, acquisitions and

other forms of alliance.

European Community 1992

Under the Single European Act which is scheduled to come into force in 1992, the nations of

Western Europe are pledged to abolish all internal

duties and tariffs, harmonize national health and

safety standards, and otherwise eliminate barriers to

the free movement of goods, services, and persons

within the European Community (EC). The resulting

free market of 320 million Europeans could become

the largest single trading bloc in the world.

The implications of EC 1992 for the defense

market are unclear. While the Treaty of Rome

specifically excludes defense trade from the purview

of the European Economic Commission, Article 30

of the Treaty gives the Commission general responsibility to “maintain the technological and industrial

conditions necessary for . . . security. ” This basic

ambiguity is being widely debated in Europe. The

French Government, for example, which looks

toward an greater political voice for the EC, argues

for a broad interpretation of Article 30, while the

U.K. is opposed because it wants the EC focused

entirely on economic matters.

Another point of contention is Article 223 of the

Treaty of Rome, which permits member nations to

list those items of defense procurement to be

excluded from EC trading rules on grounds of

national interest. Here the argument is whether it is

legitimate to exclude such items as food and medical

supplies for the military that are indistinguishable

from civilian commodities.

The impact of EC 1992 on international defense

trade is yet another area of uncertainty. U.S. defense

trade with Europe to the present has proceeded on

the basis of zero tariffs in both directions.12 However, in a 1988 proposal, the EC had put forward the

— — definition of such trade to include only complete

1 lclt~ by ThOtWIS Olmst=d, “Selling OfTAmeric&” Foreign Po/icy, September 1989, p. 129.

IZNot ~ E~o~ com~es ~Ve impofled W U.S. defense equipment duty free.
Chapter 3--European Policies in Perspective ● 55

The tempo of defense cooperation between the United States and Israel is quite fast. The two countries have

signed a bilateral trade MoU (Memorandum of Understanding), and U.S./Israel government-to-government

cooperation in defense technology has expanded in the past 4 to 5 years. More than 30 Data Exchange Agreements

are in effect between the nations, covering areas of military tactics, technology and weapons. Both coproduction

and codevelopment programs are underway. The United States has acquired and deployed several Israeli-designed

systems.

The United States and Israel also cooperate in industrial programs, partly as a result of U.S. guarantees for

Israel’s security. Israel has historically been a major benefactor from the U.S. Security Assistance Program and has

received the largest share of Military Assistance Programs and Foreign Military Sales credits. Nearly all Israeli

security assistance funds have flowed back into U.S. companies, which in turn, have produced sophisticated

weapons and systems for the Israeli Defense Force.

With the bilateral trade MoU has come a greater attempt by Israeli industry to sell directly to DoD, with uneven

results. Israeli companies have demonstrated growing knowledge of the U.S. market and DoD’s procurement

system. In selected cases Israeli battle-proven weapons and expertise in advanced technologies have been acquired

by the United States.

Since the Camp David Accords were signed in 1978, the United States has assisted Egypt in developing its

armed forces and defense industrial base. A few data exchange agreements are in place and a number of

co-production efforts have begun.

The United States has sold major defense systems to Saudi Arabia under the Foreign Military Sales program,

including AWACS and F-16s. These sales and subsequent support have have been profitable for U.S. defense

companies. U.S. industry lost significant sales in 1987 when the Saudis signed a major defense equipment deal with

the United Kingdom. The U.K. program, named Al Yamamah, was viewed by some observers as a reaction to the

refusal by Congress to approve the sale of additional F-15s to the Saudis.

systems such as tanks, airplanes, etc. The United defense industries for the purpose of bringing France

States vigorously protested this, since U.S. defense into its deliberations. The IEPG was of minor

exports to Europe consist now almost entirely of significance until the issuance of the Vredeling

subsystems, which would be subject to tariffs under Report in 1986, which called for much greater

the proposed EC definition. European collaboration in weapons production. This

Another EC 1992 issue that may affect international defense trade is the treatment of foreignowned subsidiaries. The EC asserts that these

subsidiaries will be treated as European-owned

firms only if high value-added activities (research,

design, engineering, etc.) are performed in Europe.

The intention here is to block the establishment of

so-called ‘‘screwdriver’ plants in which imported

high-tech components are merely assembled.

Over and above these specific issues, it is certain

that EC 1992 will have a major impact on how

weapons are produced and traded in Europe if

simply because nearly all European defense producers also have large civilian sector operations.

led in the subsequent endorsement by European

defense ministers of an Action Plan listing as the

major goals:

●

●

●

The Independent European

Programme Group (IEPG)

The IEPG was established in 1976 as an off-shoot

of the NATO-affiliated Eurogroup of European

●

establishment of an open European market for

defense procurements, including sharing of

national procurement plans and defining areas

for European-wide competition;

“Juste Retour,” ensuring that intra-European

national defense imports and exports roughly

match through a system of recording crossborder contracts;

technology transfer policies that promote the

dissemination of government-supported defense R&D to all IEPG member nations;

assistance to Less Developed Defense Industry

(LDDI) members (i.e., Greece, Portugal, and

Turkey); and

creation of a common fund for defense R&D to

be allocated by the IEPG.
56 ● Arming Our Arming Our Allies: Cooperation and Competition in Defense Technology

To what extent these goals will be realized is

questionable. First, unlike the EC, the IEPG has no

legal status. The Action Plan represents little more

than a loose set of intentions, albeit with official

sanction, and there is by no means a full consensus

on its implementation. German industry, for example, expresses strong reservations about the “Juste

Retour” and LDDI goals, which may result in a

substantial displacement of employment from Germany to other countries. Second, and perhaps more

important, is the question of how the IEPG will

affect defense relations with the United States. There

is great ambiguity here, and what is said about the

intentions of the IEPG depends on who the audience

is. In Europe it is widely understood that the impetus

behind the Vredeling Report and the Action Plan

was the fear of domination of the European weapons

market by U.S. producers. However, in explaining

the IEPG for U.S. consumption, the emphasis is on

how the creation of a ‘‘European Pillar” in defense

production will make the Europeans stronger and

better NATO allies. Increasing economic unity

arising out of EC 1992 may create need for a central

procurement agency, which is being studied in the

IEPG.

One of the difficulties facing the IEPG is how to

differentiate its common fund for defense R&D,

known as EUCLID,13 from other European cooperative civilian research programs covering dual-use

technologies. EUCLID has been off to a slow start

compared to other cooperative efforts. Estimated

allocations to EUCLID amount to only $140 million, compared to $5.4 billion for European Research Coordinating Agency (EUREKA) programs.

One European source indicated to OTA that

EUCLID was created primarily to tap Bundeswehr

R&D funds, since West German law prohibits

contributions of these funds for civilian projects.

European Industrial Integration

The European defense industry is rapidly positioning itself to face tougher competition in leaner

times. On the national level, there is a continuing

concentration of defense producers through mergers

and acquisitions. In the key aerospace and defense

electronics sectors, the trend is for each major

producer nation to remain with one or two large

firms: British Aerospace/Westland/GEC in the United

Kingdom; Daimler-Benz/MBB/Siemens in Germany,

Aerospatiale/Dassault/Thomson CSF in France. On

a smaller scale, intra-European strategic alliances of

these major firms are being created through such

mechanisms as stock swaps and joint acquisitions

as, for example, the recent successful GEC/Siemens

acquisition of Plessey.

The United Kingdom

The United Kingdom has consistently outpaced

the other European states in defense spending and

support for defense R&D. Stung by some costly

failures, such as the Nimrod airborne early warning

system and under tight national defense budgets, the

United Kingdom has in recent years sought to raise

efficiency by privatizing government-owned defense industries and research laboratories. While the

United Kingdom traditionally has been the strongest

European proponent of transatlantic defense cooperation (e.g., Trident, Harrier) a perceptible shift

toward a more European orientation has taken place

during the past 5 years. The 1985-86 furor over the

Sikorsky bid for Westland Helicopters was dramatic

evidence of the sensitivities underlying the issue of

U.S. defense influence. United Kingdom defense

exports have been a bright spot in an otherwise

lack-lustre industrial picture, and may have been

behind the United Kingdom’s strong support to

reactivate the IEPG. Another motivation may have

been to deflect French attempts to upgrade the

influence of the EC in defense and political affairs.

13EWo~~ com~~ ~W.tem ~ti~ve for D~e~e. At ~ ~~m~~ iII L.isbn iII emly 1988, priority research fields for the EUCLID

program were listed as radar technology, microehxtmnics and semiconductors, composite materials, avionics, artificial intelligence, opto-electronics,

simulators, underwater listening devices, stealth and space surveillance. See Michael Gueriq ‘EUCLID Defense Coopemtion Seen Essential,’ D@ense

& Armament Heracles, Paris, September 1989, pp. 041.
Chapter 3-European Policies in Perspective ● 57

France

French defense policy has long been oriented

toward autarchy in domestic procurements and a

strong export effort. France has also been most

sensitive to U.S. defense influence in Europe, and

tends to suspect ulterior commercial motivations for

U.S. defense initiatives. The French devised the

EUREKA civilian research program in direct response to U.S. efforts to obtain European cooperation for the Emerging Technologies and SDI programs, on the grounds that a U.S. motivation was to

stunt the development of European R&D. Increased

French activism in European defense affairs during

this decade may be partially influenced by the

objective of stemming West German neutralism, and

perhaps more importantly by commercial interest.

The previous go-it-alone policy, typified by the

Rafale fighter designed specifically for Third World

export, has not been a success, and France is

therefore positioning itself to obtain a larger slice of

the NATO defense market. The French strategy in

this regard may be to use the levers of the IEPG and

EC 1992 to displace U.S. defense sales to the smaller

NATO countries, the last significant European

market in which U.S. defense technology predominates. For success in this strategy, the French will

have to team with the United Kingdom or West

Germany, and may already be worried about a

growing U.K./German defense production nexus.

West Germany

Although West German industry has achieved a

dominant industrial position in Europe,governmental

support for defense R&D has been relatively small.

For historical reasons, the Germans have been

reluctant to develop a large independent armaments

industry and engage in direct defense exports. They

therefore prefer a teaming approach (e.g., the Tornado fighter) which provides the benefits of hightech domestic employment and a share of export

sales, without the political disadvantage of being a

Defense Collaboration

With Canada

Canada is treated differently by DoD from the

rest of the NATO Allies. The United States and

Canada have shared a long history of defense and

economic cooperation codified in more than 200

agreements. As part of the North American industrial base, Canadian companies can compete for

U.S. programs that fall under U.S. Mobilization

Base restrictions. The 1987 U.S./Canadian freetrade agreement resulted in the creation of the North

American Defense Industrial Base Organization

with abroad charter to promote and administer joint

peacetime Industrial Preparedness Programs. The

existence since the 1940s of a bilateral defense trade

agreement has also emphasized Canada’s special

position in defense cooperation with the United

States.

In some mission areas, e.g., North America air

defense, the two nations have established close

government-to-government ties. U.S. companies

find it easy to cooperate with their Canadian

counterparts. However, Canada’s outlays for defense R&D and its overall defense industrial base

are small compared to those of the United States, the

major NATO countries, and Japan. Accordingly,

Canadian/U.S. defense cooperation is small in

relation to overall U.S./Allied defense collaboration.

prime contractor. This low-profile attitude may now

be changing. With the merger of Daimler/Benz with

MBB, the Germans will have a prime defense

contractor of formidable proportions, although it

still will be heavily weighted towards the civil

sector. German international industrial strategy appears founded on teaming German firms with a solid

civilian R&D base with foreign firms specializing in

defense R&D. Thus, the acquisition by commercially oriented Siemens/GEC of the defense-based

Plessey firm seems to be a logical result of this

strategy.

28-6 1(3 o - go - 3
—

.

Chapter 4

Emergence of

Transpacific Collaboration:

The Case of Japan

●
.

,

●

●
Chapter 4

Emergence of Transpacific Collaboration: The Case of Japan

SUMMARY

Cooperative defense programs have been fundamental in U.S.-Japan security relations since the

Korean war. Defense collaboration has been pursued

for both economic and strategic military reasons, but

until recently the United States has favored the latter

while Japan has placed at least equal emphasis on the

economic aspects of such programs. The United

States generally has been willing to overlook the

economic consequences of these policies to satisfy

its higher priorities of preserving the regional

military balance in Asia and of assuring that Japan

remains a close ally.

The shift from Japan as buyer to Japan as

developer of independent weapons systems has

forced the United States to reconsider its traditional

postwar policies, especially because advanced technologies have potential applications in both military

and civilian sectors. Furthermore, Japanese firms

have pursued a different agenda throughout the

postwar period, emphasizing the economic gains of

military production at least as much as their military

benefits. With Japanese industrial capabilities nearing or surpassing those of the United States in many

fields, the potential economic challenges to the

United States cannot be dismissed.

COOPERATION WITH JAPAN

The Mutual Cooperation and Security Treaty of

1960 established the fundamental basis for the

overall U.S.-Japan bilateral security relationship

while the Mutual Defense Assistance Agreement

(MDAA) of 1954 established the legal basis for

providing equipment and technology to Japan. As

Japan’s role as a provider of technology grows, the

agreement is also important to U.S. policymakers in

developing arguments for technology ‘flow-backs’

to the United States to reciprocate, in a sense, for

years of technological imports by Japan.

Collaboration between the United States and

Japan in the production of advanced weapons

systems, and transfer of military-related technology

from the United States to Japan, emerged in the late

1970s as a key element of the overall growth of

U.S.-Japan defense cooperation and Japan’s effort to

build up its military capabilities. By the end of the

1980s, however, collaboration had become controversial between the two nations amidst growing

economic disputes between Tokyo and Washington.

The merits of collaboration were debated by government officials, influential organizations, and individuals on both sides of the Pacific.1 The belief that

collaboration is mutually beneficial was under

criticism by the end of the decade. This, coupled

with a changing international security environment,

has made collaboration a more uncertain proposition

in Japan-U.S. relations of the 1990s.

Collaboration in defense production goes back to

the beginnings of the defense relationship in the

1950s. The MDAA provided the basis for sales of

American weapons to Japan and the coproduction of

weapons systems developed in the United States.

The agreement provided for broad exchanges of

defense “equipment, materials, services, or other

assistance, and it contained a reference by Japanese Government officials to the desirability of U.S.

assistance to Japan’s defense industries.

Coproduction emerged in the 1960s as the key

element of defense production collaboration, accelerated by the discontinuation of American military

assistance to Japan in the mid-1960s. Cooperative

programs expanded after 1975, and remained paramount until the latter part of the 1980s. Nearly all

arrangements were made between Japanese and U.S.

firms with government approval. Under these transactions, the two governments signed a Memorandum of Understanding (MoU), to allow Japanese

firms to produce U.S. equipment under a licensing

agreement. The U.S. firm typically provides data on

manufacturing procedures, machinery and tools,

components, management assistance, and help in

quality control.

The U.S. and Japanese Governments agreed to

two other forms of collaboration in the 1980s. The

first dealt with the transfer of Japanese military

technology to the United States and was formalized

in an exchange of notes in November 1983. The

notes established a Joint Military Technology ComIconwm Ovti tie FSX were widely publicized in the United States. For Japan’s part, these problems timt~~~~lves in S~te@c ‘eU

Initiative (SDI) negotiations, where private businesses in Japan were concerned that they would not be allowed by the terms of participation to utilize

advances for commercial products.

-61–
mission (JMTC) to review requests by the United

States and the responses of the Japanese Government. The Japanese Government promised in the

notes to facilitate the flow of military technologies

to the United States and to encourage the transfer of

related technologies (dual-use technologies such as

materials, operations systems, and components)

developed for nonmilitary purposes but applicable

to advanced weapons systems.

A second new form of collaboration is codevelopment. The prototype of a U.S.-Japanese codevelopment agreement is the FSX fighter. General Dynamics Corp., the U.S. participant, will provide an

advanced airframe and wing sets for testing and aft

fuselages. Japanese firms will contribute a phasedarray radar, and reportedly new, lightweight materials for aircraft wings. Under a MoU signed in

November 1988, U.S. firms in the project will have

access to this Japanese technology. U.S. firms will

receive 35 to 45 percent of the development costs

paid by the Japanese Government and about 40

percent of the $5 billion realized through sales to the

Japanese Government. Unlike codevelopment projects between the United States and NATO countries,

the United States does not intend to acquire the FSX

for the U.S. Air Force.2 In U.S.-European codevelopment deals, a U.S. commitment to purchase is

often an integral offset of guaranteed profits to the

American participants.

THE U.S. POLICY FRAMEWORK

Although economic considerations have not been

entirely absent from U.S. policy, military and

security considerations have been the decisive

elements in U.S. policy toward Japanese arms

production in the post-World War II period. American strategy has separated the economic, political,

and military components from one another. Issues

have been viewed in isolation or in the context of

overall U.S. relations with East Asian nations,

specifically regarding the security ties deemed

necessary to counterbalance communist influence

and Soviet military presence in the region. From a

foreign policy perspective, both the United States

and Japan frequently warn of the danger of trade

tensions spilling over into the defense arena.3

As early as the Korean war, U.S. defense planners

saw the utility of Japan serving as a forward line of

defense in Asia, providing both abase for U.S. forces

in the region and a source of logistical support.

Japanese business and government saw opportunities for economic recovery in the same crisis. Japan

resuscitated its domestic aircraft industry in 1952 by

manufacturing spare parts for U.S. military aircraft

based in Japan, a full 2 years before the establishment of either the Self-Defense Forces or the Japan

Defense Agency (JDA). Total aircraft production in

Japan rose from 29 million yen in 1952 to 2,451

million yen the following year.4 During the 1952-54

period, demand by the U.S. armed forces in Japan

constituted between 60 and 80 percent of total

aircraft production. The Japan Defense Agency

gradually supplanted the U.S. presence, and by

1958, over 80 percent of total aircraft production

was directed to JDA needs.5

Because of the relative weakness of the Japanese

economy in general and the aerospace industry in

particular, these growth trends were not viewed with

any sense of alarm. Instead, they justified U.S.

policies to help stimulate economic growth in the

war-torn Japanese economy, to reduce the threat of

Japan becoming a burden for the United States, and

to strengthen the security alliance in the Pacific.

These strategic factors also predominated in the

years that followed.

The U.S. strategic posture provided the policy

framework for more generous coproduction agreements from 1978 through 1985. F-15 fighters, P-3C

antisubmarine aircraft, and Patriot surface-to-air

missiles were either specified in Reagan administration proposals for Japan’s self-defense or fell within

the U.S. emphasis on Japan’s air defense and sea

control capabilities. They were also central to the

U.S. goal of persuading Japan to modernize existing

forces rapidly. Key Japanese sea and air defense

systems (such as the F-104 fighter, P-2J antisubmarine aircraft, and the Nike-J surface-to-air missile)

were either aging or obsolete by 1980. Coproduction

?Industry observers have suggestd howev=, tbat General Dynamics is looking to the project in order to help develop its “Agile Falcon,” an

advanced version of the F-16 for deployment in Europe with multiple missions capability. Daniel Sneider, “Mitsubishi, General Dynamics ‘Very

Close’ ‘lb Signing FSX Conhac4° D~ense News, vol. 4, No. 49, Dec. 4, 1989, p. 8.

%icbard L. Armitage, “The U.S.-Japan AUiance,” Defense 86, July/August 1986, pp. 20-22.

4Socie~ of Japanese Aerospace ComP~es* ‘V “Aerospace Industry in Japaq 1987-88,” p. 11.

%bid., pp. 3-13.
Chapter 4-Emergence of Transpacific Collaboration: The Case of Japan . 63

offered a means of bringing modern systems into the

Japanese military arsenal within a relatively short

period of time.

U.S. officials also viewed coproduction as helping to achieve the objective of broadly based defense

cooperation, which 1978 guidelines spelled out.

Stepped-up coproduction occurred amidst progress

in joint planning, an expansion of joint military

exercises in scope and frequency, greater coordination of intelligence, and agreement on the U.S.

deployment of F-16s to the Japanese home islands

(U.S. fighter squadrons had been stationed only on

Okinawa). 6

The Pentagon also stressed the military advantages of common use by U.S. and Japanese forces of

U.S.-designed weapons.7 Standardization of weaponry would facilitate combined operations and

would make possible mutual logistical support,

including the establishment of joint stockpiles of

weapons and ammunition and the U.S. ability to

resupply Japanese forces in a war-fighting situation.

The Pentagon, however, displayed concern about

maintaining g control and secrecy over sensitive

technological components of weapons produced

through coproduction. There was concern that such

technology could fall into the hands of the Soviet

Union or other unfriendly powers.8 The Department

of Defense (DoD) rejected the JDA request to grant

Japanese firms access to all software in coproducing the Patriot missile, including the guidance and target identification components.9 Similarly, DoD withheld data on electronic systems,

radar equipment, and compounds used in the body of

the F-15.10 Nevertheless, subsequent reviews of the

F-15 MOU resulted in the Defense Department

releasing some materials technology and other items

that had previously been withheld.ll

Commercial considerations have played a secondary role in the decisions of U.S. Defense Department

officials regarding coproduction. In contrast to that

attitude, the Japanese Government has consistently

shown a preference for coproduction over direct

purchases of American equipment, a policy that was

augmented with the end of U.S. military aid to Japan

in 1968. Coproduction was an established practice

by 1975. It also coincided with numerous coproduction arrangements with NATO Allies. Official U.S.

policy, in fact, had designated Japan as one of

several countries eligible for coproduction of U. S.-

designed equipment.12

While DoD ignored or minimized the commercial

impact of its policies, commercial considerations

became paramount in the decisions of U.S. companies to enter into coproduction.13 License fees and

the lucrative upgrade business have rivaled or

surpassed the profits companies could make through

off-the-shelf sales without posing any problems

associated with expanding production for comparatively small orders. In addition, U.S. firms have

been dissuaded from holding out for direct sales by

their assessment of several factors: the Japanese

Government’s commitment to progressive coproduction of American weapons rather than purchase,

the parallel policies of NATO governments favoring

coproduction, the occasional possibility of Japanese

coproduction deals with European competitors, and

Japan’s growing capabilities to produce similar, if

less technologically sophisticated, systems without

foreign participation.

DEFENSE PROGRAMS AND

CIVILIAN SECTORS

In 1984 a Defense Science Board report noted

Japan’s pattern of indigenous defense production

6U.5$ COnW=S, JO~t ~no~cco~tt~, SU~Ommi~~ on ~ono~c Go* ~d ~t~govemmen~ policy, Japan’s Economy and Trade With

the United States: Selected Papers, 99th Cong., 1st sess., 1983, p. 209.

T.S. Congress, General Accounting CMce, U.S. Military Co-production Programs Assist Japan in Developing Its Civil Aircraft Industry,

#ID-82-23 (Gaithersburg, MD: Mar. 18, 1982), p. 1.

8~c~el w. ~Wo@‘C~d~~ andGOVe~~t ~ Japanese Def~ procm~ent: The ~ of the patriot Missde Systeq ” MIT-Japan SCieQ@

and Technology Program Working Paper 88-04, 1988, p. 21.

%bid., pp. 24-25.

l~e~d D1-ifte, ‘ ‘Japan’s Growing -S~dustry, ’ P. S.I.S. Occasional Papers Number 1/85, Genev% Switzerland, Program for Strategic and

International Studies of the Graduate Institute of International Studies, 1985, pp. 75-76.

1 Iu.s. Cowss, ~ner~ ~om~g ~lce, U,S. Military Co-prO&tion program Assist Japan in Developing Its civil Aircraft Industry,

#ID-82-23 (Gaitherxburg, MD: Mar. 18, 1982), p. 7.

lz~id$

13u.5. ~p~at of tie by, ml= of ~~gemcnt ad Budg@ ‘ ‘Second AQIIUal Repofi on tie Impact of Off~tS fi Defense-Related fipOfiS, ’

December 1986, p. II-29.
64 ● Arming Our Allies: Cooperation and Competition in Defense Technology

and underscored the Japanese Government’s role in

high technology, its drive to develop self-sufficiency

in defense production and the perceived link between commercial and defense projects.14 A 1985

DoD task force report identified 16 dual-use technologies, including fiber optics, X-ray lithography, and

ceramic materials in which the Japanese excelled.15

More recent Japanese assessments have stressed

this ‘spin-on’ the use of existing and new commercial technologies in the military sector and/or

developing new military products and applications

out of commercial technologies. This philosophy

was a major element in Japan’s Choices, a recent

survey of future economic policy directions sanctioned by the Ministry of International Trade and

Industry (MITI).

IMPLICATIONS OF MARKET

STRUCTURE ON TECHNOLOGY

TRANSFERS, BILATERAL

COMPETITION

The competitive impact of U.S. collaboration in

defense technology with Japan is heightened because Japan has a limited number of market participants, each of which is in a position to absorb

technology from a number of mature U.S. firms.l6

As illustrated in figure 4-1, major Japanese contractors typically have overlapping relationships with

several U.S. defense contractors. While many of the

Specific programs illustrated in the figure are dated,

the patterns nevertheless demonstrate that Japanese

companies are the focal points where technology

from several U.S. firms converge in cooperative

programs. These same Japanese firms often have

prime contractor-subcontractor relationships that

facilitate the transfer of technology throughout the

domestic industry. By implication, any technology

transferred from a single U.S. firm has the potential

to benefit multiple contractors in Japan.17

The high degree of subcontracting in Japanese

defense production contributes to the potential for

building the Japanese defense industrial base

through licensing agreements with American companies. In keeping with trends throughout Japanese

industry, the percentage of subcontracted work in

Japanese programs can run as high as 80 percent.

This diffusion of contracting work contributes to the

growth of the domestic defense industrial base in

Japan. Since subcontractors are also a significant

source of innovation for Japanese civilian industries,

similar patterns could emerge in domestic defense

industries as well, as these companies grow more

experienced in defense production. Thus, proportionately larger numbers of firms in Japan have potential

opportunities to develop their capabilities through

licensed defense production from the United States

and emerge as possible competitors to U.S. firms,

especially to second-tier contractors. The competitive implications for the United States extend

beyond the military sector because of the emphasis

by Japanese firms on multiple applications of

technologies, their highly diversified, vertically

integrated structures, and the relative lack of regulatory and other obstacles that would retard application of military technology to civilian products.

In many Japanese facilities, civilian and defense

production occurs side-by-side.18 Subcontract work

for Boeing aircraft has been carried out in Mitsubishi

Heavy Industry’s (MHI) Nagoya works along with

F-15 production and the now defunct MU-300, a

private corporate jet that failed to make headway in

either U.S. or Japanese markets. This constitutes a

subsidy to those industries in Japan that work with

defense--to the extent that production facilities and

overhead costs financed by defense budgets are

actually exploited for nonmilitary production. This

possibility also appears evident in the case of MHI

missile production, where missile production facili14u.s.~~at of WfU, HIW of the Under Secretary of Defense for Research and Engineering, Report of the Defense Science Board Task

Force on Industry-to-Industry International Armame nts Cooperation: Phase Il+Japan (Sprin@el~ VA: National Technical Information Service, June

1984).

15u.s ~p-nt of Defense, 0ff3ce of The Under Secretary of Defense (Acquisition), Research and Advanced Technology, “Electro-oPties

Millimeter/Microwave Technology in Japam’ report of the DoD Technology TeanL 1987. The preliminaq report was iasued in May 1985 and the

final report was released in May 1987.

ISSW am. D for a di,a~sion of the domestic defense indushy in Japan.

ITG~, w@R.E. JOhnSOq 6 cTtitxs of United stim Aerospace Technology to Japan, ” Raymond Vernon (cd.), The Technological Factor in

International Traak (New York, NY: Bureau of Economic Researc& 1970), pp. 305-363.

18Prepared testimony of Joseph E. Kelley, director, Security and International Relations Issues, National Security and international Affairs Divisioq

Gczmal Accounting Of?iee, before the House of Representatives Energy and Commerce Subcmnrnittee on Commerce, Consumer Protection and

Competitive, Feb. 23, 1989, p. 8.
Chapter 4--Emergence of Transpacific Collaboration: The Case of Japan . 65

Figure 4-1-Coproduction of U.S. Planes, Helicopters, and Engines in Japan, 1954-66

Japanese Aircraft/engine Us.

companies programs companies

T-34

Fuji

Cessna

Kawasaki

T-33A

P2V-7

i

F-104J

Lockheed

Mitsubishi

North America

s-55

S-61

S-62

SH-3A

UF-XS

Shin Meiwa Grumman

T-58

lshlkawajlmz-Hanma J-79 General Electric

1

SOURCE: G.R. Hall and R.E. Johnson, “Transfers of United States Aerospaee Technology to Japan,” Raymond

Vernon (cd.), Z% Tdnologiml Factor in International Trade (New York, NY: Bureau of Economic

Research, 1970), p. 314.

ties have been separated entirely from other aerospace facilities to provide additional production

capabilities.

From time to time, American defense firms also

use workers and production facilities for one program that actually were financed by another.19

Japanese companies have taken this one step further,

adding civilian production to the picture and multiplying the potential for diversification and entry into

new markets. This could explain why Japanese

industry is proceeding to expand defense production

despite the apparent costs and limited markets. It

also raises the question of whether Japanese companies use their defense investments more effectively

than the United States. The “spin-on” theory in

Japan is not limited to products; it also extends to the

facilities used to produce them.

This has important implications for the United

States if domestic defense budgets are reduced

drastically. Effective use of production capabilities

provides Japanese firms with more numerous options than those available to U.S. defense contractors. If the military component of the Japanese

missile market fails to materialize, for example,

MHI will be in a position to reallocate production

facilities to projects in the country’s growing civilian space program. Although such a shift is not

beyond the abilities of American defense contractors, U.S. firms nevertheless are often so dependent

on DoD contracts that they may face insolvency

before they are able to anticipate and implement

comparable adjustments to market conditions.20

This is not a recent phenomenon for Japanese

fins. It is literally a way of life. For example,

l~~d L. ~~, compe~rion in D~eme ProcWement (wa-toq ~:Brook@s hti@tio~ 1989), pp. 13-15.

Z3see ‘$~=sment of Re~~ch and Development @pO@tieS k Defense-Related Technologies, ” September 1989, p. 3.
66 ● Arming Our Allies: Cooperation and Competition in Defense Technology

Yamaha, a well-known manufacturer in Japan of

musical instruments, shifted production from pianos

to aircraft parts as conflicts heightened in World War

II, only to shift back to piano manufacturing, after

the surrender, with equal ease and fluidity. While

other Japanese firms may have had more difficulty

than Yamaha, recent indications point toward Japanese agility in shifting between different types of

production. 21 It is likely that Japanese companies

will be better able to adapt to changing defense

budgets while also being able to benefit from

spinoffs and spin-ens from technology transfers

resulting from cooperative programs. In Japan,

defense budgets have grown steadily over the past

two decades at stable rates, unlike their more erratic

U.S. counterparts. This provides additional longterm stability in the domestic defense industry,

reducing uncertainties facing Japanese managers

and strategic planners. Although additional data are

needed to draw firm judgments, it is reasonable to

believe that sharing defense and civilian resources

(plant facilities, skilled labor, etc.) is a common

practice in Japanese firms, especially among larger

contractors. This suggests that excess defense production capacity in Japan can be converted with

relative ease to commercial production, and that

‘‘surge capacity’ may belittle more than a backdoor

means of expanding commercial production capabilities.

ATTITUDES TOWARD DOMESTIC

PRODUCTION

Cooperative programs with Japan, as in Europe,

tend to move up the collaboration ladder from

licensing toward codevelopment. The more work

allocated to local industries, the more experienced

and skilled these firms have become. This in turn has

led to higher expectations of contributing more

value-added components in successor programs.

Ultimately, of course, this could threaten U.S.

companies through the creation of potential competitors, although Japan would have to modify its ban

on the export of military technology.

In the Japanese experience, there is an import

substitution pattern of replacing U.S.-licensed systems with domestic counterparts as soon as is

feasible. In some instances it involves components,

as in the case of avionics upgrades for F-4 Phantoms

originally produced under license. In other cases,

complete systems have been supplanted by domestic

alternatives, including the AAM-3 (which replaces

the U.S. Sidewinder air-to-air missile), the ASM-1

(in place of the U.S. Harpoon air-to-surface missile),

and the Keiko-SAM (in place of the U.S. Stinger, a

hand-held missile used for short-distance, point

defense).

The JDA has announced costly defense programs

specifically to develop successors to systems supplied by the United States, in many cases under

license production arrangements. These include a

medium range surface-to-air missile system (currently designated M-SAM) to replace Raytheon’s

Hawk SAM and a supersonic engine development

program that optimistic observers in Japan have

suggested could be used for the FSX, alleviating any

need to license an engine from the United States for

the program.22

INDIGENOUS PRODUCTION V.

COLLABORATION

The 1954 Mutual Defense Assistance Agreement

stated the Japanese Government’s goal of developing a domestic defense industry, and the government

has followed this policy consistently, giving it

increased priority as it began the defense buildup in

the late 1970s. The government reaffirmed its

intention to develop and provide business for private

defense firms in a “Basic Policy for Development

and Production of Defense Equipment” put out by

the Defense Agency in 1970.23

Like many European governments, Japan has

chosen this course despite the higher costs and

longer lead times associated with domestic production. A primary objective is to provide opportunities

for Japanese companies to develop and expand

production in defense, and to apply civilian technologies to weapons systems, both in the initial

production stage and in followup modifications and

improvements. A stronger, more diverse defense

industry gives the government more flexibility and

21F~~ ~ e~tion of the contrasting experience of the United States in terms of transforming peacetime industry to war production and then

back again, see Merritt Roe Smith (cd.), Milicary Enteqwise and Technological Change (Cambridge, MA: MIT Ress, 1987).

Z2$tjapm t. ~velop F~St Independent Surface-to-Air ~ssile! “ Nikkei News Service, Apr. 20, 1989; “Defense Agency to Develop Supersonic

Engine,” Nikkei News Service, Aug. 11, 1989.

23R&~01d ~~, ‘tJw~)s ~~~kdus~,” op. cit., footnote 10, pp. 10-11.
Chapter 4--Emergence of Transpacific Collaboration: The Case of Japan ● 67

independence in setting future defense priorities. It

also ensures availability of spare parts and prompt

maintenance.24

Political considerations are also important. The

government faces a continuing problem of justifying

the defense buildup in the face of anti-defense public

sentiment, media that are often hostile to military

programs, and opposition political parties unsympathetic to stated defense goals. A policy that supports

domestic industry through defense programs helps

gain the support of business and business-influenced

groups for defense policy, including increased

defense spending. 25 Nevertheless, the government

continues to restrain the development of a defense

industry, by imposing extensive restrictions on arms

exports, which the government outlined in 1967 and

expanded in 1976.

Coproduction and codevelopment with U.S. firms

helps domestic industries secure technology that

will improve their capabilities in diversifying potential weapons production and in related nonmilitary

fields. The government’s 1976 defense white paper

declared foreign licensing agreements had “accomplished the acquisition of manufacturing technology. . "26 The 1988 white paper elaborated that:

“In recent years, various high technologies have

been increasingly integrated into military, hence it is

desirable that Japan should utilize to the fullest

extent the defense-related technologies owned by

the U. S.” It added that Japan would seek from the

U.S. secret technical information in order to strengthen

Japan’s future research and development of military

equipment.

27 The 1989 white paper laid out similar

policy aims with regard to codevelopment with the

United States.28

These sources would indicate that the Japanese

Government clearly has a long-term objective of

producing major weapons system strictly with

Japanese resources and technology. It stated this

preference in the 1976 white paper and prescribed

coproduction and importation of foreign production

technology to fill gaps in Japanese industry’s

expertise. 29 But the Japanese Government is not so

cohesive as these sources suggest. In the FSX case,

for example, industry, the JDA (including the

Technical Research and Development Institute (TRDI)

and the Air Staff Office), and MITI’s Aircraft and

Ordnance Office advocated domestic development.

On the other side, MITI’s Trade Bureau, JDA’s

budget officials, the Ministry of Finance (MOF), and

the Ministry of Foreign Affairs were either cautious

or opposed to domestic development without U.S.

collaboration. Despite the careful groundwork laid

by the proponents of indigenous development, the

final decision endorsed collaboration .30

As noted in appendix C, security policies are

formed to a large extent by committee, with nonmilitary interests representing important views. These

include, for example, those of the Ministry of

Foreign Affairs, which is concerned with the impact

of increasing autonomy in defense production on

relations with the United States in general, and the

mutual security treaty in particular. Some argue that

even the economic interests represented by MITI do

not necessarily translate into support for indigenous

systems, noting that in 1986 the ministry revised its

approach to aircraft development to emphasize

international cooperation. Even former defense agency

directors do not always side with those in the agency

favoring autonomous production, noting again the

importance of restraining autonomous development

and production in the name of relations with the

United States.31

Some analysts argue, however, that ‘restraining”

domestic development and production does not

necessarily mean reversing the trend toward increasing domestic supply of weapon systems, but

simply slowing the pace a degree. They interpret

MITI’s well-publicized decision to encourage international cooperation as a tactical adjustment in a

long-term strategy that remains directed toward

uJapan Defense Agency! “Defense of Japam 1978,” p. 117.

2.5~c~el w. ~wo~ ‘‘~~q ~ Government in Jq~e~ ~f~~ ~o~mm~’ op. cit., footnote 8, p. 10.

~Jap~ Defense Ag~y, “Defense of Japan 1976,” p. 126.

nJapan Defense Ageney* “Defense of Japan 1988,” p. 181.

~Foreign Press Center (Japan), “S~of ‘Defense of Japan 1987, ’ “ p. 49.

~Japan Defense Ag-y, “Defense of Japan 1976,” pp. 125-127.

3oRichard J. Samuels and Benjamin C. Whipple, “Defense Production and Industrial Development: The Case of Japanese Aircraft” Chahners

Johnson et at. (eds.), PoZirics and Productivity (Cambridge, MA: Balinger Press, 1989), pp. 293-305,

31Fo_= ~tor gew~ Koic~ ~to, for eqle, en~c~t~ Such vi~s in an intefiew on Feb. 28, 1989 with the Astthi Shimb~ one of Japan’s

leading daily newspapers, on the FSX controversy.
developing a domestic aircraft industry. In this view,

the means alone have changed, with Japanese

companies being encouraged to team with foreign

partners in the short-term to realize this long-term

objective rather than relying solely on internal and

government resources.

In addition, the annual defense white paper has

continuously underscored the policy objective of

self-reliance since its initial publication in 1970. The

white paper must be formally approved by the

cabinet and the Security Council to be released and

as such represents official government policy. There

can be no doubt that policy divisions have existed in

the past and will continue in the future. However, the

long-term trend is toward autonomy at this point and

represents a continuum throughout the postwar

period.

Those who do not see a Japanese effort to supplant

foreign systems entirely with domestic products

point to the FSX codevelopment program, and to

recent Japanese decisions to acquire Aegis destroyers through the Foreign Military Sales program from

the United States. Each vessel purchased will bring

in over $500 million in sales to this country.

Furthermore, it is likely that Japan will also deploy

U.S. AWACS in the near future. These transactions

will help maintain the U.S. shine of Japan’s defense

market in the short-run, which varies, but is currently

about $1 billion annually in sales and license fees.

These analysts believe that the Japanese white

papers state policy in a very general way, allowing

flexibility on the part of various actors, and therefore

that less emphasis should be placed on them in

identifying policy, at least if the concern is with

actual government behavior.

However, these cases are more important initially

for their precedent-setting value in overall security

policies for the government than as potential sales to

industry. Both Aegis and AWACS will represent

quantum policy leaps in the context of Japan’s

postwar defense policy because of their highly

advanced capabilities. Decisions to deploy sophisticated defense equipment can become highly politicized issues, subject to intense parliamentary debates. Consequently, deployment decisions can be

defended more easily if other diplomacy and/or

political agendas are addressed by doing so. In this

case, the procurements can be justified in part in the

name of improved U.S. relations since they will

generate significant U.S. contracts or sales that will

help diminish divisive trade frictions.

For JDA, the important thing is the precedent of

deploying state-of-the-art military systems that will

give the Self-Defense Forces greater technological

leverage. Once these foreign-supplied systems are

deployed. however, both industry and government

may lobby for substituting domestic upgrades for

foreign components in deployed systems. This may

lead to further pressures for the development of

totally domestic replacements.

U.S. v. JAPANESE APPROACHES

TO SECURITY

By the end of the 1980s, the escalation of

economic and trade disputes had begun to affect a

number of defense issues between the two countries,

including cooperation in military technology. U.S.

sensitivity to and fear of Japanese economic competition has subjected defense cooperation to considerable scrutiny. Critics charge that coproduction and

codevelopment programs transfer to Japanese companies technology that may later be useful in

producing civilian goods that compete with U.S.

products, and specifically that collaboration in

military aircraft will assist Japan in building up its

civil aviation industry. The issue came to a head in

the FSX controversy when critics in Congress nearly

succeeded in blocking approval of the codevelopment agreement.32 Attempts in Congress to prevent

the sale of the Aegis air defense missile system to

Japan also were intended to deny Japan access to

advanced air defense systems and automated defense technology.

Others are concerned that Japan may eventually

drop its ban on arms exports and become an instant

competitor of U.S. arms export fins. They cite the

views of the Japanese business association Keidanren and other industry groups in favor of relaxing

the prohibition; several borderline cases of overseas

sales of dual-use equipment; and the logic of

exporting as defense production grows and diversifies. Indeed, some Japanese executives already feel

they produce a variety of weapons, especially

missiles, that would compete with U.S. counterparts

for third-country markets, even if they fall somewhat

s~or dew of& t=~olo= ismes of the FSX de~, 5* Jo~ Moteff, Libq of Congress, Congressional R~~ch Service, “FSX TechoIogy:

Its Relative Utility to the United States and Japanese Aerospace Indushies,” CRS Report No. 89-237, 1989.
Chapter 4--Emergence of Transpacific Collaboration: The Case of Japan . 69

below the technological sophistication of American

arms.

33

The 1983 U.S.-Japan agreement to exchange

military technology, the Joint Military Technology

Commission, represented an attempt to alleviate the

growing perception in the United States that only

Japan benefited from existing arrangements. So far,

however, the results have been modest. The United

States has applied for only three systems, and

transfer has taken place under the agreement since

1987.

It is difficult to explain these results, which some

observers cite as evidence of the failure of the

transfer agreement and mechanisms. Reluctance on

the part of both U.S. and Japanese companies has

been cited as one cause. American firms still are

unaccustomed to turning to foreign sources for

technological inputs in the design and development

stage, perhaps a cultural reflection of “not invented

here” attitudes. Given the limited U.S. corporate

presence in Japan, it is reasonable to question the

extent of knowledge within industry and government of militarily applicable R&D in Japan,

especially among civilian sector firms. Without

extensive knowledge of Japanese capabilities, it is

difficult to expect success of the arrangements

established by the 1983 notes. Finally, many U.S.

defense contractors still see Europe, not Japan, as

their primary market, and see little justification for

making corporate commitments in Japan beyond

those that already exist.

Japanese companies, for their part, face similar

considerations to the extent that defense technology

transfers represent a departure from established

business. Furthermore, despite increasing emphasis

on defense-related sales, they are still concerned

about antidefense public opinion, and do not wish to

risk being labeled arms merchants for fear of losing

commercial sales. Japanese firms, aware of the

importance of technology to their own growth, may

be less willing to part with vital technology under

any circumstances, no matter how lucrative the

financial rewards might be. Some observers have

accused Japanese firms of simple greed. In the Keiko

surface-to-air missile case, for example, the guidance developer, Toshiba Corp., sought $5 million for

the technology, reflecting the company’s entire

R&D costs (the firm finally settled for a $500,000

payment).

Mirroring the lack of activity through the JMTC

channel is the slow pace of other codevelopment

projects proposed by Japan in June 1988. Five

projects were proposed for Nunn Amendment funding:

1.

2.

3.

4.

5.

millimeter wave/infrared hybrid seekers;

ducted rocket engines;

armor-piercing, fro-stabilizing, discardingsabot (APFSDS) and shaped-charge ammunition;

gas dynamic laser optical jamming systems;

and

technology for analyzing and estimating magnetic fields.

The U.S. Army has indicated interest in the first

two, and while finding no direct applicability in the

third, nevertheless has proposed exploring cooperative projects in related areas such as electromagnetic

technology. The United States apparently has little

interest in the fourth and fifth areas. Japanese

motivations for participating in these projects include the desire to enhance Japan’s armaments and

weapons capabilities, solid@ its technological base,

and compensate for insufficient investments in these

areas until recently .34

There are several working-level panels that have

helped promote relations and day-to-day contacts

despite the relative lack of success at more highly

publicized levels, such as the Japan-U.S. Systems

and Technology Forum (STF). The bilateral panel

has met roughly once a year since its establishment

in September 1980, focusing on such issues as joint

communications problems, bilateral technology assessments, and cooperative production programs.

Although initially viewed by many Japanese officials as a means to facilitate technology transfers

from the United States to Japan, the STF served as

a vehicle for encouraging Japanese participation in

Strategic Defense Initiative research and exchanges

of views that led to the 1983 exchange of notes on

military technology transfers.35

33& Stim SubW Heiki Sangyo (Tokyo: Asahi Shimbuns@ 1986), pp. 12b127.

34u.s. ~y Materiel Co mrnand, ‘Assessment of Research and Development Opportunities in DefenseRelated Technologies, ” Repml of the Army

Reciprocal Visit to Jap~ September 1989, p. 5.

35s= J~an Defense Ageney, “Defense of Japan 1988,” p. 179.
In commercial sales transactions, however, reliance on Japanese products has grown to the point

that it has become a national issue. The Pentagon

and U.S. defense firms are purchasing significant

numbers of Japanese components for weapons

systems, especially electronics components. U.S.

defense companies reportedly are subcontracting

increasingly with Japanese suppliers due to cost

factors, and American firms are dropping out of

certain segments of the domestic electronics and

computer chip business.36 This is a different issue,

however, from that of reciprocal technology transfers, especially from Japan to the United States.

FUTURE ISSUES—JAPAN

At least four sets of issues will influence the future

of defense technology relations between Japan and

the United States in the early 1990s:

1.

2.

3.

4.

the impact of military-related technology and

weapons development policies on Japan-U.S.

competition and cooperation;

the rise of Japanese industrial capabilities

coupled with the level of tensions in overall

U.S.-Japan relations;

global security issues, especially the current

changes in the communist world and in U. S.-

Soviet relations; and

internal Japanese political trends.

On the question of the impact of Japanese defense

spending increases on Japan-U.S. competition it has

been noted repeatedly that Japanese business and

government emphasize a far more integrated approach to defense and civilian technologies. Under

these circumstances, Japanese firms are likely to

benefit from cooperative programs regardless of

what steps this country takes to minimize the

disadvantageous aspects of technology transfers.

This circumstance points to the need for policymakers to define acceptable compromises that

inevitably will involve economic, political, and

military tradeoffs. Attempting to secure Japanese

contributions into new codeveloped weapons systems might be a desirable policy option for the

United States, but it will also mean elevating the

capabilities of the Japanese defense industry and

potential competition for the United States in the

future. By the same token, U.S. observers should not

be shocked by Japanese proposals to acquire aircraft

carriers if Japan assumes responsibility for sea-lane

defense to the 1,000-mile perimeter, the policy

encouraged by the United States.

Arms export resistance is strong in the Japanese

public, and any government would risk a political

backlash if it changed current policy. Nevertheless,

there is pressure on the government to change course

and each precedent may make it more difficult to

hold the line on the export of complete weapons

systems. As dual-use technologies proliferate and as

Japanese overseas investment becomes more active,

these policies will likely come under fire. The issue

of exporting complete systems may become moot

because of the proliferation of dual-use technologies, their reduced half-lives, and relative affordability. This would complicate U.S. efforts to manage

technology flows with military applications and the

growth of competitors in international markets.

MITI and MOF have remained relatively consistent in their efforts to restrict Japanese investments

in overseas companies with defense production

facilities. In the specific case of the United States,

DoD regulations governing foreign acquisitions of

companies essential to national security have influenced possible acquisitions of U.S. defense companies by Japanese firms.

Internal Japanese politics also have ramifications

for bilateral relations, although to a lesser extent.

Over 30 years of continuous rule by the majority

Liberal Democratic Party, appears to have been

reaffirmed in the March 1990 elections, despite

gains by the opposition in the July 1989 House of

Councillors elections. It is nevertheless possible that

an opposition coalition led by the Japan Socialist

Party (JSP) could come to power in the foreseeable

future. A stronger, more influential opposition is

likely even though these electoral gains have come

primarily in the less important house. The JSP has

moderated both the tone and substance of its critical

positions on U.S.-Japan security relations, intimating that the party would welcome a continuation of

the bilateral security treaty and would not challenge

the legitimacy of the Self-Defense forces.

There will continue to be disagreements between

the United States and Japan about the degree of

Japanese domestic development and production of

%fichael Schrage, “U.S. Dependence on Japan for Parta Worries Pentagom” Wadu%gkm Post, Mar. 11, 1986, p. Al. The Defense Science Board

examined U.S. dependency on foreign semiconductors in its February 1987 repon ‘‘Defense Semiconductor Dependency. ”
Chapter 4--Emergence of Transpacific Collaboration: The Case of Japan ● 71

new, advanced weapons systems. To deal with these

conflicts the United States will have to make some

decisions regarding the extent and nature of Japanese participation in the cooperative development of

future U.S. systems and what prices the Japanese

will be expected to pay for participating in these

programs. The United States may have to accept a

tradeoff between the development of a potentially

competitive Japanese aerospace industry and the

degree of participation permitted in future codevelopment/coproduction projects.

Another area of uncertainty is Japan’s ability to

use military technology, including U.S.-supplied

technology, in developing civilian products and

clones of U.S. weapons. Japanese firms are adept at

internalizing technology introduced from abroad,

and likely will identify new applications for technologies unanticipated in the United States. Focusing

excessively on the aircraft industry risks missing the

point of a diversified Japanese long-term industrial

strategy of using technological inputs from military

production for everything from fishing rods to high

performance aircraft.

In the U.S.-Japan context, defense-related technology transfers should not be viewed as one-on-one

relationships between individual Japanese and American fins. While an American company might have

extensive experience with one or perhaps two

Japanese companies, Japanese firms have overlapping relations with many U.S. companies. This

situation, coupled with interdependent relations

through informal corporate ties and extensive subcontracting arrangements, improves the opportunities

for technology diffusion throughout Japanese industry. Japanese firms have made significant progress in weapons development, particularly in the

area of missiles. Industry observers generally agree

that older generations of American technologies

already have found their way into many of these

Japanese systems by virtue of cooperative programs.

The dilemmas of coproduction are illustrated in

Raytheon’s experience with Japan in the Sidewinder

air-to-air missile. Japan sought Raytheon’s Sidewinders AIM-9B in the 1970s at a time when

domestic development of a similar guidance system

was a high priority for JDAs TRDI. When it became

evident that the Sidewinder guidance package was

not available for release to Japan, JDA and TRDI

embarked on a development program that resulted in

the AAM-l, a Sidewinder replacement that was to be

utilized on the domestic F-1 fighter aircraft.

The AAM-l was in line to become JDA’s favored

air-to-air missile, replacing Sidewinders entirely. But

the domestic guidance development was suspended

temporarily once the United States indicated to the

Japanese Government that the more advanced Sidewinders AIM-9L would be available for local production in Japan.37 This option appealed to JDA because

it would give greater access to the Sidewinder

guidance and would thus promote the goal of

developing domestic counterparts. MHI completed

an agreement with Raytheon to license produce the

Sidewinder in Japan in 1980, and JDA shifted its

infrared guidance efforts from AAM-l production to

further research in TRDI.

In the meantime, advances have continued on the

AAM series, and while U.S. industry experts are

divided on its technological capabilities compared

even with earlier Sidewinder generations, it has

moved into full-scale production and has begun

replacing Sidewinders on all Japanese aircraft that

can carry air-to-air missiles. Raytheon, the U.S.

Government, JDA, and Japanese business currently

are involved in negotiations to allow licensed

production of the next generation, the AIM-9M.

Any rationale for continuing cooperation in arms

development in the 1990s will run up against the

possibility of further deterioration of Japan-U.S.

relations. The FSX controversy helped to push

tensions to a new high in 1989. But disputes such as

the FSX do not threaten a total rupture in bilateral

relations. Their importance lies in the fact that

proponents of domestic arms production renew their

lobbying with each instance of perceived “Japan

bashing” in the United States. Autonomy is more

appealing and credible as Japanese industry grows

more proficient and capable of developing alternative weapons systems. The appeal is not limited to

industry: government officials, weary of perceived

political pressure and inconsistent policies on the

part of the United States, could side increasingly

with those who favor an independent course on

defense development and production.

The FSX controversy has raised opposition to

joint weapons programs at several levels in both

countries. If disputes over economic and trade issues

escalate in the early 1990s, it is possible that neither

37K~i(..~ yox% Nihon no Boei Sangyo, 1988, pp. 1A125, 13~131.
government would wish to expend the political

capital necessary to promote new codevelopment

arrangements like the FSX. Government and business elements in Japan, which argued originally for

independent development of a fighter, may have

their way in the future. Opponents of cooperation in

the U.S. Government may have put the Pentagon

permanently on the defensive after the FSX dispute.

This is not to suggest that the United States should

shy away from articulating its own interests in

cooperative arrangements if they threaten serious

political conflict. However, the United States is no

longer in a position to dictate the terms of participation in these programs with Japan. European firms

have recognized the marketing opportunities with

Japan arising out of the FSX controversies, and

might be less concerned about many of the issues on

which Congress focused during the FSX debate. The

Japanese Government has recently demonstrated a

willingness to select European systems over American alternatives, for example, an Italian patrol boat

for the Maritime SDF and the British Aerospace

BAE 125-800 as a flight-check aircraft. While these

are isolated cases there is no doubt that European

companies offer a comparable range of systems.

Furthermore, it indicates the willingness of Japan to

diversify its options in defense at the expense of its

traditional supplier when credible alternatives exist.

U.S. policymakers must ask whether it is possible

to establish a reciprocal relationship with Japan

given differences in the nature of defense policies

and industry contracting in the two countries. While

reciprocity appeals to those in the United States who

seek greater transfer of Japanese technology for use

in U.S. systems, it is difficult to establish criteria for

judging the degree of reciprocity in the relationship.

For instance, it has been noted that in the case of the

FSX program, the benefits of future technology

flowbacks from Japan to the United States might be

limited solely to General Dynamics (GD), the U.S.

subcontractor in the Japanese-led program, not to the

entire U.S. defense industry, much less the national

industrial base. Furthermore, since GD’s contracts

are overwhelmingly military, civilian applications

of any technology will be restricted.

This stands in contrast with Japanese firms that

are the recipients of U.S. technology transferred

through defense programs. Major prime contractors

in Japan, while increasingly emphasizing defenserelated sales in their marketing strategies, nevertheless rely on such business for only a small portion of

their total sales. With corporate strategies that

emphasize intermingling of civilian and military

technology applications, they are far more likely to

benefit from defense-related and especially dual-use

technology transfers through cooperative programs.

The high percentage of subcontracting work, the

limited number of contractors in the defense market,

and overlapping relationships with U.S. firms tend

to facilitate greater benefits for the Japanese partner

in cooperative programs with the United States.

Under these circumstances defense industrial relationships between the two countries may not be truly

reciprocal.

The rapid changes in Eastern Europe and rising

possibilities of improved U.S.-Soviet relations could

affect substantially the priority the United States has

given to the Japanese defense buildup and military

cooperation with Japan. U.S. popular perception is

that the Soviet threat has already declined markedly.

That perception could strengthen if force reductions

and other arms limitations or arms control agreements are reached with the Soviet Union in the near

fume. DoD officials already are referring to possible defense budget cuts of $180 billion over 5 years

if current developments are sustained. This would

result in major cuts in the size of the current U.S.

force structure and slowdowns in development of

advanced weapons, including conventional weapons.

Under such policies, the United States may have

less reason to encourage a Japanese defense buildup,

but the reaction in Japan could be profoundly

different. Unconvinced of peaceful Soviet intentions

in the region, and that the ‘‘framework’ of the Cold

War indeed remains in the Asia/Pacific region, the

Japanese Government has argued for holding the

present course on defense spending at least for

several more years. A decline in U.S. defense

budgets would thus encourage industry and government in Japan to accelerate their movement toward

autonomy, especially if declines are coupled with

U.S. withdrawals from the region, and with additional demands for Japan to share the burden.
Chapter 5

Commercial Implications of

International Collaboration
5-1. Differences
Chapter 5

Commercial Implications of International Collaboration

INTRODUCTION

This chapter provides an in-depth discussion of

the question of how and to what extent transfer of

military technology assists the recipient nation in

increasing its technological sophistication, and in

building an industry that can become competitive

with the United States in nonmilitary markets. But

the question of building civilian industrial capacity

is only one major implication of international

collaboration in military technology.

International collaboration also has direct implications for U.S. defense companies and affects

various sectors of the industry differently. It promotes the short term interests of the largest defense

contractors that have experience in international

business and who can make the necessary investments needed to penetrate foreign markets. Conversely it dilutes the business prospects of many

smaller companies that cannot establish international strategic alliances with foreign fins. Accordingly this chapter considers the different sectors of

U.S. defense industry separately. Three questions

are addressed:

o

●

●

Does international collaboration in defense

technology make it easier for foreign industries

to penetrate U.S. civilian markets?

What are the implications of increasing international collaboration for the large U.S. defense

companies, the system integrators?

What is the effect of increasing international

collaboration on other sectors of the U.S.

defense industry-the second- and lower-tier

subcontractors and the suppliers of components

for the defense market?

TRANSFER OF MILITARY

TECHNOLOGY TO THE

CIVIL SECTOR

Does international collaboration in defense technology make it easier for foreign industries to

penetrate U.S. civilian markets?

Civilian industries are indirectly affected by

international collaboration in defense technology. In

general, activity that builds up a nation’s technological capability in defense will also benefit closely

related technological activities in the civilian sector.

How much technology “spinoff” from defense

R&D actually takes place and benefits civil industry

(or is developed for “dual-use” under the stimulus

of a military development) is a complex question. It

is complex because nation states have varying

industrial policies, possess different rules that guide

the defense business, are at different stages of

technological sophistication, and have different

levels of civil-military industrial integration (ranging from Japan, which is highly integrated, to the

United States, which is largely separate).

Some technology is transferred in almost every

collaborative venture. How much or how easily that

process proceeds depends largely on the organizational structure of the joint project and the industrial

environment in which the participants operate.

Tightly controlled and highly segregated cooperative projects, such as classified military programs,

tend to minimize diffusion of technology to other

programs. On the other hand, technology can be

transferred relatively easily within and between

large vertically integrated companies with longstanding cooperative arrangements.

The United States has promoted a wide variety of

collaborative efforts from information exchanges,

both formal and informal, to very complex coproduction programs negotiated among several countries and their companies.1

Technology can be transferred when two or more

individuals discuss technical issues during an information or data exchange. The Department of Defense (DoD) has always encouraged and even

formalized this type of exchange. On a fundamental

level, data exchange can be a very effective process

that leads both to personal relationships and actual

knowledge transfer. In licensing, technology transfer occurs as a result of the transfer of data packages

that impart to the recipient complete instructions on

how to produce a certain part or component. In

coproduction, personnel from two or more organizations work together to be sure that the resulting

equipment meets all the requirements of the system

in question. Consequently a higher level of collaboration is involved, and the possibility of technology

Isee app. B for examples.

–77–
78 ● Arming Our Allies: Cooperation and Competition in Defense Technology

transfer is greater. However, coproduction rarely

involves state-of-the-art technology and therefore

transfer of leading-edge technology is still limited.

The highest level of technological cooperation,

and consequently the most susceptible to leadingedge technology transfer, is codevelopment, where

the two partners work together to solve mutual

problems. At this level, the opportunity for a true

two-way street in the transfer process is greatest. In

general, the closer technical personnel work together, the more easily the transfer process works.

Consequently, the process of codevelopment, where

large teams of engineering and management personnel must work together to solve mutual problems, is

a fertile ground for technology to transfer in both

directions, with new technology being generated and

available to all parties in the agreement.

Extensive foreign military sales, licensing, and

coproduction programs that the United States has

conducted with its allies over the past several

decades have been critical to building competitive

defense industrial complexes in Europe and Japan.

Starting in the 1950s and 1960s, military hardware

licensing brought these countries embryonic defense

engineering and production capabilities. Over the

years these efforts grew toward coproduction of

progressively more sophisticated and complex systems, with each new step adding to the technological

capability of the foreign participants. In making

policy choices about which coproduction programs

to participate in, these countries made political and

financial commitments that dramatically added to

their total industrial capabilities. They often paid

premium prices to create and maintain advanced

technological capabilities domestically, through coproduction programs with the United States.2 Codevelopment of military technologies that can be

used in civil applications has been an openly stated

goal of European governments for years. Further,

through intra-European cooperation, the major European powers have developed extensive indigenous

capabilities in defense technology, and have, with

few exceptions, become increasingly independent of

the United States.

In Japan a similar process has developed with one

important difference; for many years Japan’s explicit industrial policy has emphasized the acquisition of technology from abroad, mostly from the

U. S., and primarily for civilian production purposes.

Further, legal restrictions and post-World War II

cultural inhibitions have mandated defense technology to a relatively minor fraction of that country’s

industrial output. Operating under a set of coordinated industrial policies, Japan has participated in

extensive coproduction programs in the aerospace

and defense electronics fields. In doing so, it has

significantly enhanced its industrial capabilities and

has attained world leadership in important areas.

Diffusion of military technology to the civil sector

is likely when it is transferred to a country that has

an explicit policy to emphasize development of its

civilian industries and/or to integrate its civil and

military industries. This phenomenon is most apparent in Japan and Germany, where approximately 1

percent of the defense budget is allocated to defenseoriented R&D. Both countries benefit significantly

through collaboration with the United States. They

gain access to defense technology developed here,

and they are able to concentrate on civilian-oriented

technology research.

In addition, the existing close association between

military and civilian manufacturing promotes the

spread of military technology to the civil field. When

airplane wings for both civil and military systems, or

military and consumer electronics, are made side-byside in the same factories, the possibility of technology transfer is greatly enhanced. Integrated companies that do a small amount of defense work are

positioned to exploit defense technologies for civil

purposes, especially in the absence of government

policies, both implicit and explicit, that separate

civil and defense developments. Some observers

argue that U.S. companies tend to favor esoteric

defense-specific technologies, while their foreign

partners concentrate on dual-use technologies that

can later be marketed in civil applications.

Technological development moves in many directions simultaneously, in companies, industries,

and internationally. When a technology transfers

from the military to the civilian sector it called

“spinoff.” The term “spin-on” has been coined to

describe transfers in the opposite direction, from the

civilian sector to the military. Both terms can be

misleading. When there is a general increase in the

state of knowledge in a given area, and that

knowledge is applied to another application, the

term technology diffusion is, perhaps, more appropriate. In addition, it is possible to develop technolo-

% history of this process is discussed inch. 3.
Chapter 5--Commercial Implications of International Collaboration ● 79

gy with the objective of applying it both to military

systems and to consumer products.

Historically, defense technologies have exerted

significant influence on civilian commercial developments. This has been particularly true in the

United States, where DoD has sponsored a major

fraction of the country’s R&Din aerospace. Modern

jet transport and the computer provide examples of

the critical role that Pentagon R&D investment have

played in the growth of important industries.3 There

is abundant historical evidence that defense technology can provide strong leverage for commercial

industrial developments.

Spinoff of technology from defense to the commercial sector has been primarily an American

phenomenon. Whether this is so because the United

States spends so much more on defense R&D than

do other nations, or because of the high priority

given to advanced technology in U.S. defense R&D

programs, or both, is not clear. However, it is

difficult to identify major spinoff successes in

foreign programs. In Europe, programs like the

Airbus were developed as wholly civilian operations. In Japan, major efforts, such the dramatic rise

of the semiconductor industry over the last 10 years,

have been directed at strictly commercial developments.

There is evidence that spinoff no longer works

well in the United States. The greatest potential for

transfer occurs in the early stages of R&D, when

advances are generic and not product-specific. As

the technology matures, commercial and military

applications tend to diverge in performance and cost

requirements, and the technical interchanges decrease. There are fewer person-to-person contacts,

fewer technical meetings, less open journal publication, and decreased interaction on the management

level. In addition, the trend in the United States

toward greater regulation of defense businesses has

created additional barriers between civil and military technologies and industries.

The trend in the DoD R&D budget has been

toward greater emphasis on advanced systems prototype engineering and testing, rather than on the type

of applied research and exploratory development

that fosters technology transfer. 4 For example, the

Strategic Defense Initiative (SDI) program has not

produced significant technology transfer to the

civilian sector considering the size of its operations

and budgets.5 It would appear that defense technology spinoff is not a very active path at this time,

despite legislative efforts to stimulate this type of

activity. 6

DoD has the resources and the need to invest in

long-term technological developments that may

have a high payoff, but also involve substantial risks

and may have no obvious commercial use. DoD does

this to underwrite its basic defense posture, which is

to stay a generation ahead of our adversaries in

technological capability. Despite the fact that these

sorts of military technologies have on occasion

started entire new industries, such as jet transportation and computers, civilian companies appear far

less willing to invest in such high risk ventures than

in the past.

The structure of most European and Japanese

companies is well-suited to the sharing of technologies between civilian and military applications. In

many cases, the military and civilian sectors cannot

be distinguished. Military work is not a very

important aspect of the total business, frost because

the Europeans and Japanese do less defense business

than American firms since their market is much

smaller, and second, because they and their governments place a much stronger emphasis on commercial business. In Japan, the country’s largest military

3B~~ tie developm~t of tie modern jet engine, orimy by ~pple ~ ~eat Brim and ~ modern Sv@-wiflg @MI,SpOII mfi were &RCt

derivatives from military developments. The Advanced Research programs Agency (ARPA, now called DARPA) bought U compu~ tecmlogy. CVCSI

that developed for civilian purposes, in the belief @t priming this critical industry would accelerate the development of computer technology as a whole

that would in the end benefit DoD. See Kenneth Fkrrun, Targeting the Computer: Government Support and international Competition (Washington

DC: The Brookings Institution 1987); and J. Stowsky, “Beating Our Plowshares Into Double Edged Swords; The Impact of Pentagon Policies on the

Commercialkzition of Advanced Technologies,’ The Berkeley Roundtable on the International Economy (BRIE), April 1986.

4Ashton Carter, ‘‘Analyzing the Dual Use Technology Questiom” Center for Science and International AiRiirs, John F. Kennedy School of

Government, Harvard University, Cambridge, MA November 1989.

Ss= Rox~ Nimroody, Wflb Hartung, and Paul Grenier, Star Wars Spin-Ofls: Blueprint for a High-Tech America? (New York, NY: Council

on Economic Priorities, 1988). Despite the fact that technology transfer to the civilian sector is not strong for SDI, the European Community, and

especially France, has been concerned about the potential for civilian spin-off of the SDI program. They specifically initiated the EUREKA program

in response to SDI. However, EUREKA is oriented toward civilian and dual-use applications.

6For ~~w, one of five ~~t~ Pwws of&e Stevemon.wyder T&tio@y Movation Act of 1980 ww to “sthuhte improved UtiktitiOIl Of

federally funded technology development by State and local government and the private sector.”
80 ● Arming Our Allies: Cooperation and Competition in Defense Technology

contractor, Mitsubishi Heavy Industries (MHI),

conducts only 15 percent of its total business in the

area of defense, and defense production accounts for

only 0.5 percent of Japan’s total industrial output.

Consequently many companies operate their defense

efforts alongside their commercial work, often using

the same technical and management teams. At the

subcontractor level, this line is blurred further

because much of their technology is dual-use and

supplies both sectors. 7

The case of the FSX fighter codevelopment

project, where technology transfer in both directions

was a key issue in the debate, provides an excellent

example in the differences in corporate philosophy.

At MHI, new technology acquired in the codevelopment process will become available to other MHI

projects, including commercial ones. MHI has done

this before, when it carried out F-15 coproduction

efforts in parallel with its commercial subcontract

work for Boeing, while concurrently developing an

indigenous private corporate jet in its Nagoya

Works.8 Conversely, technology transferred to General Dynamics under this agreement is unlikely to be

shared with other U.S. companies, and certainly not

with the U.S. commercial aviation industry.

In the United States, defense and commercial

business organizations typically are highly segregated, even when they reside within the same

corporation. Companies separate into government

and commercial products divisions when they have

major activities in both sectors, even in cases where

the products are similar. This separation is not as

unreasonable as it sounds, given that the defense and

civil divisions must apply different technical approaches, different cost and performance considerations, different administrative and management

systems, different types of regulation, and different

customer relationship and marketing operations—

adding up to profound differences in corporate

culture. The coordination of the activities of such

companies usually occurs primarily in the board

room, which is not the best environment for the

transfer of specific technological knowledge. Some

of the differences between military and civilian

projects are listed in table 5-1.

In its effort to speed the development of greater

capacity and faster micro-chips, DoD initiated the

Very High Speed Integrated Circuit (VHSIC) program. Because of the defense-first acquisition approach used by DoD, the companies that dominated

VHSIC were defense contractors, not the commercial semiconductor industry. The program generated

special purpose, high capacity chips oriented to

specific military projects, with little or no application to the U.S. commercial semiconductor industry.9 In Japan, MITI organized an industry-wide

development program for high-capacity commercial

micro-chips that now dominates world markets, and

supplies advanced chips for U.S. defense systems.

Without the separation of defense and civilian

industries, the Japanese were able to channel their

efforts directly to the companies that could lead

them to market dominance. Figure 5-1 displays the

dramatic rise of Japanese micro-chip products from

1972 to 1987, and the attendant decline in U.S.

capability.

Because the military and civil aspects of European and Japanese industry are more closely coordinated and are dominated by nondefense interests,

foreign companies appear better able to exploit U.S.

defense technology, transferred in collaborative

efforts, for civilian purposes, than their counterparts

in the United States. To understand this phenomenon, it is necessary to explore the underlying causes

of these differences.

The separation of U.S. defense industry from the

commercial sector is a major factor. To a great

extent, this artificial separation is created and

enforced by U.S. laws and DoD regulations.10 Only

in the United States and possibly in the Soviet

Union, have defense markets been large enough to

support very large companies on defense business

exclusively. Twenty U.S. companies had more than

$1.0 billion of defense business in 1988.11 In Japan,

only Mitsubishi had sales in excess of $1.0 billion in

defense business, and that amounted 26 percent of

7A tier dis~ssion of these statistics is given in app. C.

‘See ch. 4.

9SOmc ~b~nas ~We~~aW&VHSIC pro~m WaS classifkd, the kchnoIo~ could nOt be UtUISfeITed tO tie Civflh sector. ~ ~view)

the technology was dual-use, but the chips that were built were not.

l~,so CoWss, ~lce of T~~ology ~=ss~n~ Hol&”ng the&fge: M@fai~”ng the Dflense T’echnologyi!lase, O’IA-ISC-420 (wd@tOQ ~:

U.S. Government Printing OffIce, April 1989), ch. 9.

llMi/ira~ Form, VO1. 6, No. 1, Au~t 1989, pp. 15-16.
Chapter 5-Commercial Implications of International Collaboration ● 81

Table 5-l-Differences Between Military and Civilian Projects

Military Commercial

●

●

●

●

●

●

●

●

●

●

●

●

●

Cost not as important as performance of weapons systems

Large ratio of technical to nontechnical personnel

Most products custom-designed; tendency toward

overdesign

Focus on state-of-the-art technology or leading edge not yet

state-of-the-art

Relatively few customers, the U.S. Government and its

military services, which designate how a product is designed.

Products sold as a block, vendors compete once for contract.

Marketing and sales staff more dominated by engineers

Large, long-term contracts

Much time spent on proposals and in developing

documentation (operating and maintenance manuals)

During design and manufacture, a need to define a variety of

missions; harsh, uncertain operating environment

The customer, DoD, supplies the threat and mission

requirements, while the contractor furnishes the technology;

parties work together to define final work statement

Documentation done concurrently, while job is under way

Administrative and accounting systems prescribed by the

Federal Acquisition Regulations (FAR) for maximum audit

scrutiny

Government regulatory environment covers all aspects of

operation.

SOURCE: Adapted from IEEE Spectrum, vol. 26, No. 11, November 1989, p. 4.

the total Japanese defense expenditure.12 General

Dynamics is 85 percent defense-dependent and

Lockheed is over 90 percent. For others the defense

business is large enough so that a conglomerate like

General Electric can split off a defense products

division as a business unit that does over $5.0 billion

per year. This part of General Electric is a government and defense-committed operation.

In recent years, the Department of Defense has

contracted for approximately 150 billion dollars’

worth of goods and services annually presenting

major business opportunities for many companies in

the United States and abroad. In order to conduct

such a large business, the government has its own set

of procurement rules, the Federal Acquisition Regulations, or FARs. Defense firms organize themselves

structurally, and especially administratively, to conform to these regulations, which often increases

costs compared with commercial projects. CompliHighly rest-sensitive

Fewer technical personnel; less development, redesign, and

emphasis on state of the art

Standardized, mass-produced products

More emphasis on use of off-the-shelf items to keep costs low

Different customers with differing needs. Products sold few at a

time, vendors compete for every sale.

Concerns of marketing and sales personnel often override those

of technical staff

Many customers, many orders

Emphasis on specification sheets, instruction manuals, and

warranties

Predictable product life is important

Manufacturer of equipment supplies specifications

Documentation sometimes supplied after project completion

Administrative and accounting done to standard commercial

practice

Regulations cover only specific aspects of operation such as

Occupational Safety and Health Administration, Food and Drug

Administration, export licenses, etc.

ance with the FAR is one of the factors that splits

U.S. industry into two sectors. Some argue that it

keeps commercial high-technology companies, including innovative ones, on the sidelines with

respect to DoD, while keeping defense contractors

isolated. Major reform of government procurement

and contract administration has been recommended

by many committees and knowledgeable individuals,13 by Congress, and by the Pentagon,14 but little

remedial action has taken place.

The ease with which technology appears to

transfer from military coproduction programs to

commercial ventures in Japan, and in the EC, is

primarily due to the way their industries are structured, the dominance of the civil market in their

overall economic policy, and the close working

relationships that exist between the workers in the

two sectors. There is little evidence of direct

application of specific military hardware or systems

12s= awe C for detail~ data on the Japanese defense ind~try.

IJFor ~~nce, ~ The President’s Blue Ribbon CO-sion on Defense Management, “A Quest for Excellence,” June 1986.

ids= & ~fense Science Board SUIUIII er 1988 Study on the Defense Industrial and Technology Base, 0ff3ce of the Undex Secretary of Defense for

Aquisitiom Washington DC, October 1988.

28-610 0 - ~(1 - 4
82 ● Arming Our Allies: Cooperation and Competition in Defense Technology

Figure 5-l—The Top Ten Micro-chip Producers,

1972-87

0

1 0 -

8 -

6 -

4 -

2 -

o~

0

■ United States

❑ Japa n

❑ Others

h h

In

-r

w

i!w’

-r

1972 1975 1978 1981 1984 1987

Year

“Only eight ccmpanies in existence.

SOURCE: “Survey: Japanese Technology,” The Economist, vol. 313, No.

7631, Dee. 2, 1989, supplement, p. 8.

to the commercial sector, but there is little doubt that

the technological knowledge and experience are

invaluable to the civilian sector, when the environment is right for the transfer to occur.

Conversely, when the environment is not right,

the process will just not happen. It is not the

availability of military technology that causes the

disparity in technology transfer capacity between

the United States on the one hand and the EC and

Japan on the other, but rather the vast differences in

the management structure and regulatory constraints

of the companies.

Where American corporations have attempted to

maximize technology transfer, they have gone to

great lengths to create an environment for innovation and entrepreneurship.15 Loosely organized technical teams, a maximum opportunity for interdisciplinary interaction, informal organization and, above

all, a free hand to innovative technologists have all

been found to work well. All of these attributes are

in direct opposition to the highly organized, projectspecific, mission-oriented DoD approach.

Defense companies that have no commercial

interests also have little incentive to keep technology with commercial potential out of foreign hands.

For example, because General Dynamics has little or

no business in the civil aviation field, it would not be

damaged financially if the transfer of F-16 technology to MHI aided that company in increasing market

share in world transport aviation markets. Rather,

General Dynamics is concerned about future direct

competition in the area of military systems, and

consequently, has protected several sensitive pieces

of flight control software, which are critical to

advanced fighter aircraft, but have little to no

commercial value.

During the FSX debate in Congress, there was

concern that transfer of the F- 16 technology to Japan

would assist the Japanese in building up an aircraft

industry that would eventually compete for market

share with U.S. industry. Boeing executives did not

share this concern.16 In fact, Boeing has pursued a

course that will materially and directly transfer

technological capability to the Japanese civilian

aerospace industry. Boeing’s commercial airplane

operations dominate commercial aircraft manufacturing with over 60 percent of the world market and

a Production backlog of over 4 years. 17 It is

challenged by Airbus Industries, a European consortium, which during the past 10 years has made

considerable inroads into the market, forcing Boeing

to make progressively greater financial commitments to maintain its position and eroding some of

its profitability. Boeing should be the company most

concerned about the entry of yet another strong

competitor, in the form of a revitalized aircraft

industry in Japan.

Instead, Boeing is actively pursuing collaborative

ventures with Japanese firms. It has subcontracted

major components and subassemblies of its commercial airplanes to Japanese companies since the early

1970s. In 1986, Boeing and the Japan Aircraft

Development Corp., a government-affiliated consortium, agreed to codevelop a new 150-seat passenger airplane, the 7J7. Under this agreement, Japan

was to design and manufacture 25 percent of the new

airplane in return for 25 percent of the financing. The

project was dropped in 1988 due to a downturn in the

market for small airplanes. The collapse of this

15s& mornas J. Peters, In search of Excellence (New York, NY: Harper a ROW, 1982).

16Ta~ony by p~@ condi~ Ex~utiVe vice presid~t of tie Boeing co~e~i~ Airplane CO. before the COtittee on Science, Space, and

Technology, U.S. House of Representatives, May 11, 1989.

17sW ~e~s~~“me Aircraft hdu.stry G~ Global,’ Technology Review, vol. 93, No. 1, January 1990, pp. 26-36.
Chapter 5-Commercial Implications of International Collaboration ● 83

venture represented another setback in Japan’s

ambition to develop a world class aircraft industry .18

In November 1989 Boeing announced new talks

with Japan aimed at a partnership to codevelop a

new airplane, the 767J, a model designed to compete

with the McDonnell Douglas MD- 11 and the Airbus

340. 19 Boeing has apparently made a business

decision that potential for new sales represented by

these agreements outweighs the threat of future

competition from Japan.20

The FSX codevelopment project may provide

some indirect assistance to Japan in its efforts to

establish a world-class aviation industry. But it is

unlikely to approach the level of assistance or direct

technology transfer that has resulted and will continue to result from subcontractor and joint venture

relationships between Boeing and the Japanese

aircraft industry. In many respects, Boeing’s commercial actions make irrelevant much of congressional debate over the FSX.

THE POSITION OF THE LARGE

U.S. DEFENSE INDUSTRIES

What are the implications of changes in the

environment of defense technology and increasing

international collaboration on the large U.S. defense

companies?

Major U.S. defense companies, the prime contractors and large systems integrators, strongly support

international collaboration. They have participated

in the internationalization of advanced technologies

and are now painfully aware of the loss of competitiveness of U.S. industries, the escalating costs of

new weapons, and the declining U.S. defense

market. They are concerned about political developments in the Eastern bloc countries, and the resulting

instability of defense budgets throughout the world.

The largest U.S. defense companies have taken

stock of their capabilities and believe that they are

still superior to the competition in development of

large-scale, complex weapons systems that integrate

technologies from diverse fields. Most seem to

believe that they can weather the storm by rationalizing their operations and by gaining access to foreign

markets, but the survival of even the largest prime

contractors is by no means assured.

The market for their services is, however, declining and is likely to do so more rapidly in view of

recent international political developments. The

Bush administration has announced its willingness

to reduce defense spending by as much as $190

billion between 1991 and 1995,21 and Congress may

do so even more rapidly. Confronted by what now

seems inevitable, the large U.S. defense contractors

have intensified their efforts to make foreign sales.

Recognizing the difficulty of selling directly, they

attempt to allay fears about employment and industrial development by cooperating with foreign defense firms through joint venture arrangements and

other collaborative programs.

However, the outlook for sales to foreign governments is also grim. In Europe, as in the United States,

the perception of a decreased Warsaw Pact threat is

making it difficult for countries to sustain heavy

defense spending. West Germany, for instance, has

more than matched the U.S. proposal of a 2 percent

troop reduction in the near term with a proposal for

a 20 percent reduction in the Bundeswehr. The situation is developing rapidly and unpredictably, but it

is likely that Europe will cut military expenses as

much, if not more, than the United States. If present

trends continue, the weapons development that

occurs in Europe will be accomplished indigenously.

In the search for foreign sales, the alternative to

working with foreign governments is to form

alliances with foreign companies. Such activity has

increased markedly in the last few years .22 U.S.

defense industry is searching for opportunities

where its special strengths produce a good fit with

European and Pacific Rim defense-oriented companies or teams. These alliances can take the form of

teams, joint ventures, subcontracting, suppliers of

subsystems or other business arrangements. Just as

18Forade~]~ discussion of tie Japaneseaircra.f findustry see, Richard J, Samuels and Benjamin C. Whipple, “TheFSX and JaP~’S ~t Strategy

for Aerospace,” Technology Review, vol. 92, No. 7, October 1989.

IPs= LOUiS Uchitelle, ‘‘A Japanese Strategy for Bw@L” New York Times, Nov. 3, 1989, p. D-1.

~Some a~y~w ~heve tittie U.S. Mmtit indus~ is fo~ow@ the path of many other U.S. industries ~d will lose out iU tie world ~ket due

to the lack of moderniza tion of the industry. See March, op. cit., foomote 17.

zlRickdmeney, Secretary of Defense, quoted in Stt5pbI@el&rg, ‘‘AirForceOffers Tb Close 15 Bases and Scrap Missile, ’ The New York Times,

NOV. 19, 1989, sec. 1, p. 1.

22s= Smti Sugawara, “Defense Firms Take a Global Offensive,’ Washington Post, Oct. 22, 1989, p. H-1.
foreign companies search for niche opportunities in

the U.S. defense market, American companies are

searching abroad for opportunities to obtain a

foothold.

When companies work closely in international

collaboration it is inevitable that technology is

transferred. The technology which the U.S. companies import into U.S. contracts is often very advanced and can be superior to that available in the

United States. Frequently, international collaboration also introduces U.S. companies to foreign

dual-use products, which are sold throughout the

world with few export control restrictions. These

products are often cheaper than their U.S. counterparts, and thus help the prime contractors reduce and

control costs. Technology exchanges are definitely

part of the process, and one of the incentives for

teaming. For the large U.S. defense systems contractors, the alternative to overseas marketing and

collaboration is a severe drop in business, which

many of the participants might not survive.

IMPLICATIONS FOR DEFENSE

SUBCONTRACTORS, SUPPLIERS

What is the effect of increasing international

collaboration on other sectors of the U.S. defense

industry, the second- and lower-tier subcontractors

and suppliers of components to the defense market?

The increasing internationalization of defense

business and markets creates a significant cost for

smaller and medium-sized defense companies in the

United States that depend on the prime contractors

for subcontract business. When the prime contractors create teams and make deals with foreign

companies, they agree to use foreign technology in

subsystems and components, and even to license or

coproduce them in offsets arrangements, all as part

of the bargaining process. Consequently, the middleand lower-tier U.S. defense contractors and suppliers, the makers of radars, flight control systems,

guns, landing gears, electronic components, sensors,

and even smaller subsystems and components, lose

business to their foreign competitors.

Furthermore, the smaller defense firms, which

perform a large fraction of the actual work on U.S.

defense contracts, generally cannot afford to market

overseas and are not well positioned with respect to

foreign competition. Many deal in technologies that

are widely available abroad. They face competition

from industries supported by foreign governments in

the area of dual-use technology, and they have

problems in obtaining support for their R&D to

sustain leading-edge technologies and innovative

programs. In general, DoD does not deal directly

with this group, but only indirectly through the

prime contractors. As foreign companies penetrate

the U.S. defense market, as subcontractors to U.S.

primes, as competitors through direct bids, or

through the acquisition of smaller U.S. defense

firms, U.S. second- and lower-tier companies face

stiffer competition.

Many smaller defense contractors see national

policies that favor and support the large internationally oriented companies as a threat to their existence.

They feel competitive pressures acutely as the large

prime contractors eliminate marginal domestic suppliers, turn to foreign firms, or rationalize operations

in response to anticipated budget reductions. Consequently, as an industry they have appealed to the

Federal Government to protect them from international competition.

23 Some claim that the policy of

waiving “buy-American” restrictions in international collaboration with our allies results in direct

losses to them. They believe that this tilts the playing

field against them, because foreign bidders are not

directly bound by costly DoD procurement regulations. In addition they assert that U.S. export

controls, as well as foreign protectionist practices,

keep U.S. lower-tier firms from bidding successfully

for foreign subcontracts. In this view, the U.S.

Government provides little support for small defense exporters, and U.S. export restrictions represent a significant barrier to their business.24

One industry association has brought suit against

DoD to force compliance with the Buy American

Act of 1933, as amended by 41 U.S.C. 10(a-d).25

Under bilateral Memoranda of Understanding the

ZWN ~ve been a n-r of cases where Congress has enacted laws that specflcally protect small segments of the def=se industry, ~@Y u

the result of strong lobbying efforts. A number of these cases have been reported and analyzed. See “TheImpact of Buy American Restrictions Affecting

Defense Pmcurerne nt,” report to the U.S. Congress by the Secretary of Defense, July 1989.

~~e h-s of & U.S.HOW of Representatives Committee on Banking, FiWKKX ~d Urti Aff~, SUbC ommittee on Economic Stabilization@

Apr. 18, 1989, held to hear comments on the FSX joint development agreement with Japaq brought out many of these arguments.

z5~ Natio~ Comcil for ~dus~ ~fense, rnc., pl~”nti~ V. u~”ted fj~tesDe~rtmnt of Ll#eue and Dick Cheney, Secretary of Dejense,

Defendants. Civ. No. 88-0949 NHJ, Executed Sept. 26, 1988.
Chapter 5-Commercial Implications of International Collaboration ● 85

Secretary of Defense has granted blanket waivers

from the Act for all foreign military purchases under

the MOUs. The plaintiff alleges that these waivers

are illegal, and its brief gives numerous examples of

U.S. contractors that have lost business to foreign

competitors due to actions under these waivers.

The subtier defense companies also assert that

they are damaged by offset agreements between the

prime contractors and their foreign collaborators.

Offsets allow a purchasing nation (or company) to

reduce or eliminate a balance of payments deficit

arising from a particular sale of defense equipment.

In general, the seller agrees to buy goods or services

to ‘offset’ a negotiated percentage of the cost of the

equipment in question. Offsets can be direct, in

which case they involve work directly on the product

covered by the purchase, i.e., a subcontract with the

buyer to produce some portion of the system, or they

can be indirect, in which they can be any unrelated

purchase from that company or country, i.e., effectively a case of barter.

Offsets are specifically defined when companies,

parties to an international sale, reach agreement to

supply products or services. The large defense

contractors use the promise of offsets to achieve a

favorable bidding position when competing for

foreign business. However, these arrangements create difficulties for the lower-tier contractors, which

now have to bid into a situation to which the primes

have already contractually agreed, i.e., they have

agreed to return a certain fraction of the sales price

to the buying country in the form of subcontracts. In

addition, prime contractors frequently agree to

purchase parts originally transferred to foreign

companies under an offset agreement for later

domestic production.

The middle-tier defense companies also assert

that foreign firms have advantages over the U.S.

companies in head-to-head competition. Defenseoriented U.S. companies bid under DoD procurement regulations, either because the prime contractor requires it, or because the company is operated

under the U.S. Government audit system, The

administrative overhead of complying with these

government-directed practices can be very high,

easily as much as 20 percent of the contract price.

Foreign companies operating under different rules

may have a significant price advantage in such a

competition. On the other hand, prime contractors

claim that foreign contracting practices must be

<~-f, i “) :) – 90 _ ~,

approved by the Defense Contracts Administration

Service (DCAS) and, therefore, must be equivalent

to U.S. practices.

Further, subcontractors claim that they must

operate under government mandated quality control

requirements that are complex and frequently outdated, and that foreign bidders must satisfy less

stringent rules. The prime contractors rejoin that all

foreign components must be qualified in the same

manner that domestic components are qualified.

There is considerable uncertainty about the level of

subcontract or component purchases to which U.S.

quality control standards are enforced. Subcontractors have proposed that each foreign bid should be

justified by an impact statement that assesses the

intangible cost advantages of the foreign bid, and

levies an appropriate surcharge against that bid.

U.S. high-technology companies assert that their

business potential is restricted by U.S. export

policies and, consequently, they are at a disadvantage with respect to their foreign counterparts. In

particular, the dual-use product, and third country

re-sale restrictions of U.S. export laws, create

serious barriers for U.S. companies wishing to

participate in the world market. Products that are

readily available abroad and traded with few restrictions by other nations are often restricted by U.S.

dual-use export controls. Further, many countries

are not willing to guarantee that products will not be

resold to restricted countries. For this reason, many

avoid U.S. products. Many innovative small and

mid-sized high-technology companies in the United

States decline defense business because the added

administrative problems would distract them from

their primary mission. Consequently, these companies are not direct participants in the U.S. defense

industrial base.

Despite these arguments, it is not a foregone

conclusion that the smaller, subtier, defense subcontractors lose when international collaboration in

defense technology is increased. Subcontractors

depend for most of their business on the large

systems’ prime contractors. They do relatively little

work directly for the Pentagon. Consequently, if

internationalization brings the primes more business, or even if it lets them sustain their business in

a period of falling budgets, the subcontractors may

also profit. The limited data on this subject is

ambiguous.
Appendixes
—

Appendix A

Organizational Structures for Cooperation

Defense Technology Collaboration in NATO

Within NATO, international cooperation in defense

technology and weapon systems mainly takes place in

three areas: under the NATO Infrastructure program;

within the Conference of National Armaments Directors

(CNAD); and in selected agencies known as NATO

Production and Logistics Organizations (see figure A-l).

The organizations and functions of each are described in

the following paragraphs.

NATO Infrastructure Common Funding

Of the 18 major NATO committees, only 2 directly

control major NATO procurement funding and may

intervene in procurement actions. The Infrastructure

Committee reviews and approves candidate infrastructure

programs, and the Payments and Progress Committee is

responsible for their procurement.

The NATO Infrastructure Program provides a fully

committed funding source for construction of wartime

facilities dedicated to NATO use. Of the 13 approved

categories eligible for NATO common funding, collaboration in defense technology involves only 3:

. Communications, which includes military communications, both ground and satellite, and connections

with member governments.

. Warning Installations, which includes all forms of

common use air defense and early warning.

. War Headquarters, which includes static and

mobile command systems.

The Infrastructure Program is funded by the 13 NATO

nations having committed military forces, and France

participates in selected Command, Control, Communications, and Intelligence programs.

The process for programming, funding, and implementing an infrastructure project is highly structured.

The nations negotiate a 6-year financial ceiling based on

proposals by the Major NATO Commanders, i.e., Supreme Allied Commander Europe, Supreme Allied Commander Atlantic, and the Allied Commander in Chief

Channel. The 6-year ceiling is a binding commitment to

contribute throughout the 6-year period.l

In this environment, collaboration in defense technology is a byproduct of acquisition. Procurement, even of

complex high-value systems, continues to be based on

fixed price, with some variations. In the bidding phase the

infrastructure procurement process is governed by International Competitive Bidding (ICB) procedures originally conceived to guide the construction of airfields and

other brick and mortar projects. In the execution phase a

host nation is assigned responsibility for procurement.

Figure A-l—NATO Committees Dealing with Armaments and Technology

North Atlantic Council

Defense Planning Committee

I I

Conference of National Infrastructure NATO Production and

Armaments Directors Program Logistics Organizations

d

I

● Service I ●

groups

I 1

●

● Specialized

groups Payments and ●

● Cadre Infrastructure

Committee Progress

groups Committee ●

. NATO Industrial

,

Advisory Groups

● Working

●

● Working

groups groups

●

SOURCE: Office of Technology Assessment, 1990.

Hawk

Multi-role

Combat Aircraft

Airborne Warning and

Control System

NATO Communications and

Information Systems Agency and Supply

NATO Maintenance and

Supply Administration

etc.

l~e ~-nt ~yW *OUP of am~ progr~ or slic~ (Iggs-go) w~ agr~ on at a level of 3 billion hte~tiomd ACCOWN@ UtitS, or ~ut $12

billion at present exchange rates. On the average, between 35 and 40 percent of the program is assigned to advanced technology projeets.

–89-
90 ● Arming Our Allies: Cooperation and Competition in Defense Technology

Figure A-2—Armaments Planning and Cooperation

1

National

Armaments

Main Groups Directors

Representative

(NADREPS) L

Service Groups Cadre Groups

Army (NATO Army Advisory Group) Explosives

Navy (NATO Navy Advisory Group) Codification

Air Force (NATO Air Force Advisory Group) Acquisition Practices

Specialized Groups Material Standardization

Defense Research Quality Assurance

Communications and Electronics Equipment

NATO Industrial Advisory Group (NIAG)

SOURCE: Office of Technology Assessment, 1990.

Host nations can be contributing NATO nations, NATO

agencies, military authorities, or other bodies. Either

agency or national procurement procedures are used, but

are modified by the ICBs. The guiding principle is

avoidance of discrimination, implicit or overt. In spite of

repeated efforts to bring procedures into line with the

technological realities, the nations have not been willing

to delegate the necessary authority.

Nevertheless, increasing emphasis on advanced technology made it inevitable that a way be found to inject

greater flexibility and professionalism into the NATO

systems procurement process. One step in this direction

was the September 1989 North Atlantic Council decision

to create a NATO Air Command and Control Management Agency to implement a sophisticated multibillion

dollar air defense system [the Air Command and Control

System (ACCS)]. This multinational effort is to be funded

through a combination of national and NATO Infrastructure funds and will require the involvement of the

Infrastructure committees and the ICB. Present estimates

place the total cost of the ACCS at about $25 billion. The

task simply seems too complex and costly to make lowest

acceptable bidder a practical guideline. Successful implementation of ACCS may require that individual

Alliance members give up their traditional control of

complex system acquisitions.

Conference of National Armaments Directors

(CNAD)

Armaments cooperation under the NATO umbrella is

in its third phase since the end of World War II. In the first

phase (1951-58) the nations participated in so-called

Correlated Production Programs, characterized by a

relatively free exchange of available designs and knowhow. The aim was early and quick production and it was

unhampered by national military turf protection and the

“not-invented-here” syndrome. It was doomed by rising

nationalism in Europe and gave way to the second phase

(1959-66), which focused on cooperative programs based

primarily on NATO Basic Military Requirements. These

were logical but inflexible. The third phase (1966-

present) was launched with the creation of the Conference

of National Armaments Directors (CNAD), a committee

reporting to the North Atlantic Council, thus bringing in

the French, and comprised of the member nations’ chief

procurement officials. NATO was shifted into the role of

coordinator and facilitator. The new approach offered

greater flexibility to nations, in fact so much that some

structure eventually had to be given to the process.

If a structured approach to acquisition and careful

attention to ground rules are the earmarks of the

Infrastructure Program, free-form collaboration has characterized NATO armaments cooperation. If two or more

countries agree to initiate a project, it counts as a NATO

project. As it evolves, others may join under terms worked
Appendix A--Organizational Structures for Cooperation ● 91

out with the original members. Nations may stay with a

project from its initial stages to the point of production, or

they may drop out at any time. The projects are held

together by project-specific memoranda of understanding

between the participating nations; there is no commitment

to or through NATO as an organization.

The CNAD’s subordinate structure includes scores of

committees and special groups, but most of the cooperative activities fall under one of six Main Groups (figure

A-2). These include one for each of the three services

(Armament Groups) plus a special group on defense

research and another on communications/electronics

equipment.

The sixth group, the NATO Industrial Advisory Group,

is composed of representatives of national defense

industries, who provide industrial advice to the CNAD

and the Main Groups and carry out studies in connection

with CNAD projects. There are also numerous Cadre

Groups that deal with cross-cutting subjects affecting the

activities of the Main Groups. Ad hoc groups are formed

as needed to address special one-time issues.

Both the Main and Cadre Groups have subordinate

bodies called sub-groups, panels, information exchange

groups, working groups, and study groups. A special form

of the subpolicy-level activity is the group of National

Armaments Directors Representatives. These are members of national delegations resident in Brussels who meet

every week (or more often if necessary) to deal with

current issues and to act on behalf of armaments directors

on new proposals or to followup CNAD’s semiannual

meetings.

While the CNAD structure was explicit, the process for

cooperation was not, resulting in a great deal of activity

and few results. There were a number of successful

CNAD sponsorships, including the Anglo-French helicopter, the Multi-Role Combat Aircraft, the 155-mm

Towed Howitzer and the Milan Guided Anti-Armor

Weapon. However, these programs were largely formulated outside of NATO and brought, after the fact, to the

CNAD for its blessing as NATO projects.

By the mid-1970s, it became clear that greater order

was needed in the Alliance acquisition process. As a

result, a new procedure known as the Phased Armaments

Programming System (PAPS) was established by CNAD

in 1981 to deal with spiraling defense costs and persistent

economic and budgetary problems in nations. Reducing

duplication and increasing economies of scale through

joint efforts were seen as possible solutions to these

problems.

The essence of PAPS is an orderly arrangement of

phases and milestones to track performance by participating nations. At the milestone points, a project can be

evaluated with a common review process and agreement

on the phase can be secured. Both the milestones and the
phases are aligned with nations’ internal acquisition

systems, including the Department of Defense system as

set down in DoD Directive 5000.1. While PAPS has been

implemented successfully, it still depends largely on luck,

i.e., that national requirements and schedules line up. This

deficiency is now being addressed by the NATO Conventional Armaments Planning System.

NATO Production and Logistics Organizations

The CNAD and its standing groups do not manage

projects directly; rather; project work is the responsibility

of the participating countries. These country groupings

are temporary, enduring only through the life of the

specific project. However, in some cases, the countries

may hand over the management to a NATO Production

and Logistics organization (NPLO) for long-term implementation. Examples of successful NPLOs are the

NATO Hawk Management Organization, the NATO

Airborne Early Warning and Control Program Management Organization and the NATO Sidewinder Production

and Logistics Organization. These system-oriented bodies may disband on completion of the project. Some, like

Hawk and NATO Seasparrow, have continued to handle

successive versions of the system.

In In 1969, 11 European NATO countries (not including

France and Iceland) joined under a flexible structure to

harmonize operational concepts and to cooperate in

weapons production and logistics. This was not only an

effort to find a common solution to the cost escalation of

military systems but also a recognition of the American

desire for an increased European defense effort. Spain

joined when it became a member of NATO in 1985. The

Eurogroup (see figure A-3) functions as an informal,

noninstitutionalized grouping at the levels of Minister of

Defense, NATO Permanent Representative (Ambassador

level) and senior advisers on defense issues in the various

national delegations to NATO. The chairmanship is

rotated and informal administrative support is provided

by the British Delegation at NATO Headquarters.

The work of the Eurogroup is carried out by subgroups

that operate as ad-hoc committees. The Eurogroup

operates within the framework of the NATO integrated

military structure, even though it is not legally a part of

NATO. It has contributed to NATO defense policy,

operational concepts and joint logistic and training

activities. The two most significant activities of the

Eurogroup have been the European Defense Improvement

Program, which involved a special European contribution

to NATO Infrastructure of over $1 billion, and the

formulation of Principles of Cooperation on Defense

Photo credlr: U.S. Air Forca

Refueling of a NATO Airborne Early Warning plane, which is based on a Boeing E-3A aircraft, and contains radar technology similar

to the U.S. AWACS.
Appendix A-Organizational Structures for Cooperation ● 93

Figure A-3--Eurogroup Organization

Eurogroup

Belgium Denmark Germany

Greece Italy Luxembourg

Netherlands Norway Portugal

Spain Turkey United Kingdom

EUROCOM

Promotes interoperability

in tactical

communications

1 J

I EUROLOG I

I EURO LONG TERM I

Develops long-term

concepts of military

operations

SOURCE: Office of Technology Assessment, 1990.

Equipment. The Principles have formed an important part

of the policy basis for NATO cooperation in the

development and procurement of military equipment.

They were formally adopted by the CNAD as NATO

Guidelines for Improved Equipment Collaboration.

In spite of the importance of its objectives, the

Eurogroup did not become a major factor in the processes

of European defense integration and armaments cooperation. France, one of the leaders in European defense

production, had departed from the NATO integrated

military structure a few years before the Eurogroup was

formed, and maintained this position in spite of efforts by

Eurogroup countries to draw it into their work on

armaments cooperation.

EUROMED

Promotes cooperation

in military medicine

1

EURONAD ARMS COOPERATION

Works closely with the

Independent European Programme

Group Task group

(Dormant)

In November 1975, the Netherlands Minister of Defense invited the Eurogroup countries to meet in a special

Ministerial session in The Hague. They established a new

organization, the Independent European Programme Group

(IEPG), which could negotiate with the United States on

the cooperative development and production of defense

equipment. They also offered the French a place within

the organization, which the French accepted. The IEPG

was created to specialize in armaments cooperation.

In the first meeting of the IEPG, the representatives

adopted the following objectives:

● more effective use of defense resources,

. emphasis on standardization and interoperability,

. maintenance of a sound European defense industry

and greater attention to technological excellence,

● unity in negotiation with the U.S.
The Group would work to harmonize national planning

for replacement of military systems, undertake joint

projects, and eliminate duplication of weapons production.

The IEPG set out to do for NATO Europe what NATO

had, thus far, not been able to do for its broader

membership, that is to take concrete steps toward

rationalization of the complex business of defense systems procurement. It proved to be more than the IEPG

countries were ready to take on in 1976, The European

defense industrial base was fragmented and the United

States dominated most weapons fields. The IEPG members focused on bilateral deals with the United States

rather than intra-European collaboration,

In 1984, the IEPG met at Ministerial level for the first

time and made some important decisions. The Ministers

agreed to make a thorough review of operational requirements and a greater effort to harmonize them. They agreed

not to duplicate existing developments of other countries.

Collaboration was to be carried back into the basic

technology in the form of Cooperative Technology

Projects. They also launched the European Defense

Industry Study (EDIS).

One of the main issues addressed in the EDIS was the

lack of a broad-based European defense technology base.

The EDIS Group members argued for a broad joint

research effort to build such a base, and broad collaboration in development and production keyed to coordinated

national requirements.2 After an initial guarded reaction,

the Ministers instructed the IEPG National Armaments

Directors to produce an action plan that would form the

basis for the gradual evolution of a European armaments

market. They also accepted the EDIS recommendation to

establish a small permanent secretariat in Lisbon. The

IEPG organization is depicted in figure A-4.

Building on the work of a number of ad hoc groups

composed of defense officials from all the IEPG member

countries, IEPG Panel 3 (Defense Economics and Procedures) presented the Ministers with a comprehensive

European Armaments Market Action Plan at their meeting in November 1988 in Luxembourg. In its annex (not

made public), the plan lists 40 concrete measures to be

implemented in the near-term. Ministers agreed to the

measures and committed themselves to review progress

periodically. The main features of the plan were:

. action toward a step-wise buildup of a European

arms market,

● removal of obstacles restricting cross-border competition,

. full exploitation of European resources and research

activities, and

. inclusion of Less-Developed Defense Industries in

arms cooperation.

At the same meeting the Ministers specifically agreed

to:

●

●

●

●

institute measures to increase bidding opportunities

for all member-nation companies, including the

alignment of bidding and contract procedures,

designate contact points within national procurement

agencies,

establish an information system for technology

transfer, and

set up a new IEPG Panel on Research and Technology to develop a European Defense Technology

Program.

As a result of the work of the new panel and a parallel

French initiative, the IEPG Ministers approved, in June

1989, a permanent defense research program modeled on

the civilian EUREKA research effort, called the European

Cooperative Long-Term Initiative for Defense. It will be

funded at 120 million European Currency Units or $135

million in 1990. Eleven high-priority areas have initially

been designated for study: radar, microelectronics, integrated avionics, artificial intelligence, optoelectronics,

electric gun, directed-energy weapons in support of

Strategic Defense Initiative, advanced helicopter design,

smart munitions, identification friend or foe, and military

simulation.

Most recently, the IEPG has formed a panel to analyze

how Europe’s drive to create a unified market by the end

of 1992 will affect arms procurement in the 13 IEPG

countries. The panel to examine the European Community’s (EC) single market program will consider such

issues as the EC proposal to standardize national defense

tariffs and to conduct oversight of cross-border mergers

between large companies.

In In March 1948, the Foreign Ministers of Belgium,

France, Luxembourg, The Netherlands, and the United

Kingdom met in Brussels to sign the treaty that established the WEU. This was followed in 1954 by the Paris

Agreements, which brought the Federal Republic of

Germany and Italy into the organization. They also

created a WEU Council, a Parliamentary Assembly, and

an Armaments Committee. The Committee was to

provide a focus for cooperation in arms production and

procurement. It was never able to compete with the far

broader database of the institutions of NATO, or later with

the IEPG. Generally overshadowed by NATO and the

European Community, the WEU went into a long period

of dormancy.

In 1987, the Foreign and Defense Ministers of WEU

met in Venice to revive the organization and to find anew

%dependent European Programme Group, “’fbwards a Stronger Europe, “ vols. I and II (Belgium: NATO Headquarters, 1987).
Appendix A--Organizational Structures for Cooperation . 95

Figure A-4—lndependent European Programme Group (IEPG)

Independent European

Programme Group

(IEPG) Ministers

I

I

State Secretaries

I 1

1

[

r

IEPG Staff Group National Armaments European Defense

Directors Industrial Group

Permanent

Secretariat

I

I I

1

IEPG/Panel 1 IEPG/Panel 2 IEPG/Panel 3

Operational Requirements Research and Procedural and

and Programs Technology Economic Matters

SOURCE: Office of Technology Assessment, 1990.

role for it as Europe began the process of closing ranks.

The reason for relaunching WEU was to establish an

organization that could act as an executive committee of

the European Allies, promoting integration of the different European national armaments industries.

The function of the WEU as a catalyst and inner forum

seems reasonable; but it cannot be expected to play any

significant role in the movement toward European

defense industrial integration. Its membership does not

include all of the players and it lacks the essential

connection to unified military planning. Even those who

see a larger role for a WEU augmented by newly created

agencies concede that its work should be within the

NATO framework. The WEU Platform on European

Security Interests, approved in 1987, suggests a defense

role for the EC in paragraph 2, which states:

We [the Foreign and Defense Ministers of the

Member States of the WEU] recall our commitment

to build a European union in accordance with the

Single European Act, which we all signed a s

members of the European Community. We are

convinced that the construction of an integrated

Europe will remain incomplete as long as it does not

include security and defense.

References in the Platform to military and armaments

cooperation failed to mention the IEPG.
Appendix B

Techniques and Mechanisms for Cooperation

Security Assistance

The Security Assistance Program

The U.S. Security Assistance Program was established

on the principle that the security and economic wellbeing

of friendly governments are vital to U.S. interests. This

activity provides for military and economic assistance,

including: the sale, grant, lease, or loan of equipment;

technical assistance; military education; and training.

programs are managed by the Department of Defense and

the Department of State. DoD programs are administered

by the Defense Security Assistance Agency (DSAA) and

include:

. Foreign Military Sales (FMS)

. Foreign Military Sales financing; and

. The International Military Education and Training

program.

The programs administered by the Department of State

are:

● The Economic Support Fund;

. Peace-keeping Operations;

s Commercial export sales licensed under the Arms

Export Control Act.

Under the FMS program, DoD serves as a contracting

authority to foreign governments that wish to buy U.S.

equipment. DoD provides information on weapons capabilities, establishes procurement mechanisms, and ensures that the systems, once delivered, can be operated

and maintained. The degree of interaction between the

U.S. military and technical personnel and their foreign

counterparts is substantial. Although the receiving government is responsible financially, significant technical

and industrial commitments are made in turn by the

United States.

The majority of DoD’s technical assistance efforts are

coordinated by the DSAA, one of its tasks under the

overall U.S. Security Assistance Program.l These activities are normally tied to specific weapons or systems and,

generally, the objective is to develop in-country capabilities to independently maintain and operate the U. S.-

supplied equipment. Accordingly, manufacturing knowhow and detailed information on designs and technologies are not involved in the agreements. However, some

agreements are long-term and naturally serve to establish

country-to-country relationships that may evolve into

other forms of cooperation.

Foreign Military Sales Activities

Because of its long-standing legislative backdrop, the

Foreign Military Sales program operates under established and well-documented procedures. If a foreign

country decides to consider acquiring U.S.-developed

equipment through FMS, it requests an initial cost from

DSAA, known as Planning and Review (P&R) data. If,

based on P&R data, the country wishes to pursue the

matter further, it will request Price and Availability

(P&A) data. The P&A data should provide enough detail

to permit further agreement to proceed. This agreement is

embodied in what is called a Letter of Offer and

Acceptance (LOA), the document used by DoD formally

to offer to sell defense equipment or services to requesting

countries. The LOA includes a description of the equipment or services, the estimated costs, the terms and

conditions, etc. Rigorous timeframes are generally imposed on the preparation, review, and approval of FMS

documents, both to protect the parties involved and to

abide by the appropriate legislation.

During the 1960s, FMS was used extensively by our

Allies. Today, governments, especially the Europeans,

have become more sophisticated in their weapons procurement and often prefer to acquire through commercial

arrangements. Purchasing governments must also pay for

the cost of FMS services, adding to the cost of the

equipment. Finally, using the U.S. Government as the

contracting authority eliminates the flexibility associated

with negotiating directly with U.S. suppliers. On the

positive side, under FMS the U.S. Government is

responsible for the contracting and for assuring that the

equipment or service meets pm-agreed requirements. If

there are contractor problems with delivery or performance, DoD is responsible for their resolution. FMS is still

a viable alternative for less advanced countries in the

Middle East, the Pacific Rim, and other regions,

Information Exchange

Information exchange takes place informally, through

bilateral military, engineering or scientific discussions,

Personnel Exchange programs, organized conferences, or

through formal bodies such as information exchange

groups within NATO’s Conference of National Armaments Directors. The bulk of these activities are conducted either through Data Exchange Agreements or

Information Exchange Programs. Participants are usually

not required to advance into other, more rigorous forms

of cooperation, although this occasionally does occur.
Appendix B--Techniques and Mechanisms for Cooperation ● 97

Data Exchange Agreements

Military departments or defense agencies initiate and

conduct activities under Data Exchange Agreements

(DEAs). DEAs do not require review and approval by the

Office of the Secretary of Defense, nor do they require

much in the way of funding (e.g., personnel costs, travel,

data analysis, and data processing). They can cover nearly

any subject, ranging from general categories of warfare

and tactical concepts to specific technologies.

DEAs are usually managed by an individual whose

specialty lies within the subject area. He may be located

at a field command, an R&D center, a Service laboratory,

or an operational command. While DEAs are tracked at

Service Headquarters, only broad direction is provided at

that level. This is not surprising; each Service may have

scores of DEAs active at any time, They are considered a

normal method for maintaining communications with

Allied military counterparts on tactics, requirements,

weapons, and technologies.

DEAs have occasionally evolved into cooperative

R&D programs, but this is not their stated purpose. They

are mainly a means for military-to-military cooperation

and are usually confined to the military departments with

little or no interactions with industry, They are also

personality dependent, with some DEA managers working aggressively with their Allied counterparts and some

less demanding—and the results are correspondingly

greater or less. When DEA managers are transferred, the

work can come to a virtual stop until someone with

sufficient interest and motivation is assigned. This is a

significant weakness, due largely to the bottom-up nature

of most information exchange.

Next to FMS the most widely used forms of governmentto-government equipment cooperation are coproduction

or dual-production agreements. Unlike security assistance, which is highly structured, these agreements are

flexible and are tailored to each situation. In some

arrangements (e.g., the F-16 European coproduction

program), provisions are made for dual-production lines

for subassemblies, components, and final assembly.

Components manufactured by one partner may find their

way into the final system of another, and no one partner

may make all components. Manufacturing specialization

may also be achieved. For example, in the case of Airbus

and Tornado, one partner manufactures a particular

component or sub-assembly for all the partners, providing

economies of scale.

For dual-production or coassembly variants, the entire

manufacturing process (for all components and subassemblies) and/or final assembly may be conducted at

different locations. Dual-production/coassembly schemes

eliminate the benefits of economies of scale (i.e., a single,

high-volume production line), but provide for alternate

sources for international competitive procurements. The

Sidewinder and Stinger production programs are examples of dual production; the missiles were manufactured

both in Europe and the United States.

Sizable political and financial commitments by the

participating governments are required for successful

coproduction agreements. If the item to be produced is

U.S. designed, complete data packages (including design

data and manufacturing know-how) must be transferred to

the receiving countries and their industries. Manufacturing, system integration, and final assembly will be

performed outside of the United States and the foreign

participants must ultimately know the system almost as

well as their U.S. counterparts. Although advanced

technology does not necessarily transfer under coproduction agreements, a general improvement is likely in Allied

competence in related design practices and technologies.

While the transfer of these capabilities may raise security

or competitiveness issues, there are positive effects as

well. As foreign governments and industries become

more familiar with the features of the item being

coproduced, improvements may evolve that can flow

back into the United States, thus improving U. S.-

produced equipment or systems.

Memoranda of Understanding

The principle mechanism for U.S./allied coproduction

is through a Memorandum of Understanding (MOU),

signed by all participating nations. MOUs are also used

for most other collaborative efforts that involve a

financial commitment by the participants. There are

general MOUs that promote defense trade between the

United States and individual nations, and there are

program-specific MOUs that may cover different phases

within a single program. For example, an MOU may be

executed to conduct concept formulation studies for a

major new weapon system, Once completed, anew MOU

will be executed for project definition or engineering

development, and a subsequent MOU would cover

coproduction activities. New partners may join at any

stage, or others may drop out.

Negotiating and concluding Memoranda of Understanding is a complex process in DoD. The Undersecretary of

Defense for Policy has the responsibility (under DoD

Directive 5530.3) to oversee the entire international

negotiating process, and DoD negotiators (usually in the

military departments) are delegated the authority to

conduct negotiations, with a separate authority to reach

agreements. Coordination is also required on MOUs with

the Department of State and often with the National

Security Council. Additionally, as the economic implications of armaments cooperation have become more

important, consultation with the Department of Com-
merce and the U.S. Trade Representative has been

initiated.

Negotiating and concluding an MOU for coproduction

(or codevelopment) is becoming a major task for Service

program managers. Not only must they balance U.S. and

foreign interests, but they must find a way to resolve the

various concerns and interests within the U.S. Government.

The most difficult and intense form of cooperation is

codevelopment. Close associations are needed, often

requiring the formation of integrated, multinational design teams and a significant transfer of technology and

know-how among partners. As with coproduction, codevelopment programs can take on different characters,

depending on the nature of the design tasks and the

government-to-government agreements. For example, if

a codevelopment program can be subdivided so that

design teams can work independently, different nations

(or companies) may take full responsibility for developing different portions of the system. But this can only be

effective if clear interfaces can be defined between

subelements, and there is mutual confidence in the design

abilities of the partners. It also means that each partner

will have to transfer a total design package to other

partners at a later stage if coproduction is to take place. A

variant of this design specialization could be that subsystem interfaces are fixed, allowing different design teams

to develop interchangeable (but different) modules, thus

establishing qualified dual sources for future competitions.

Most often, codevelopment programs require integrated design teams that include engineering and technical representatives from all participating nations. This

increases the need to transfer personnel and to accommodate different design practices, skills, and languages.

With either separate or integrated design teams, codevelopment is the most difficult of all forms of cooperation to

carry out. The benefits, however, can be substantial.

Although total R&D costs may be greater because of the

inefficiencies of collaboration, the cost to individual

participants is less, often making codevelopment the only

affordable means to acquire advanced weapons. Also,

each nation acquires technology and know-how from the

partners, adding to its overall defense technology base. A

greater understanding of the requirements usually results,

increasing the likelihood of equipment standardization,

interoperability, and common logistics. Follow-on coproduction agreements can be more easily established and

should be more efficient.

Nunn-Roth-Warner Amendment

Since 1986, the principal means available to DoD to

encourage international codevelopment has been the

Nunn-Roth-Warner Amendment to the fiscal year 1986

Defense Authorization Act, and its subsequent annual

reauthorizations.

The amendment:

●

●

●

authorized a specific level of DoD funding exclusively for NATO cooperative R&D projects,

authorized expenditures of additional funds for

side-by-side testing of Allied and U.S. systems and

directed that DoD identify and consider cooperative

developments or existing-Allied systems as-alternatives to U.S. development programs or systems at

every step of the acquisition process.2

One important provision of the Nunn Amendment

required that the appropriated R&D funds be spent in the

United States. The intent of this provision was to

encourage Allied governments to contribute financially to

cooperative programs; therefore, the U.S. money could

not be obligated without a formal government-togovernment agreement that would lead to a mutual

commitment of funds. While European partners were

required to make equitable contributions to the program,

they were not required to match U.S. contributions.

The list of Nunn Programs began with an initial group

of seven candidates, agreed at a February 1986 special

meeting at NATO Headquarters. It has now grown to 28

programs under contract, with 8 more awaiting contract

action and 11 in negotiation. Establishing a separate R&D

budget line item was a powerful incentive for DoD and

U.S. industry to look for opportunities for cooperation

with NATO Allies.3

As with many top-down initiatives, there were some

difficulties encountered when DoD began to implement

the Nunn Amendment. There were, for example, no

agreed guidelines on how candidate programs were to be

selected by the Services and approved by the Office of the

Secretary of Defense (OSD). The rules are now being

established. Funds were initially divided equally among

the Services and defense agencies, but now there is a

single, OSD-controlled budget for which the Services

must compete. How and when to negotiate with potential

partners was also unclear, with each initial Nunn program

handled somewhat differently. Now a rather rigorous

procedure has been established for requesting authority

from OSD to negotiate and to contract.

One of the main criticisms of the Nunn Amendment has

been that the Services view it as a means to fund projects

that do not have sufficient priority within their own

% subsequent mhizations, Nunn amemlmmt programs have been extended to our allies in the Western Pacific.

3Nunn armndrmnt Cooperative R&D Pun&8 for 6SCSI years: 198641OOM; 1987-$ 145h& 1988-$ 150M; 1989-$ 154M; 1990-$ 117M.
Appendix B-Techniques and Mechanisms for Cooperation ● 99

budgets, and that they will not support Nunn programs

after the Nunn funding runs out (nominally after 2 years).

While some Nunn programs may have been ill-advised,

there are others that clearly hold high priorities, and which

are now (or will be) supported fully by Service money.4

Several Nunn programs have encountered budget

problems. For example, the Air Force dropped out of the

Modular Stand-Off Weapon, and the United Kingdom has

pulled out of the Advanced Sea Mine and the NATO

Anti-Air Warfare System. All in all, however, there

remains a much higher level of R&D cooperation now

than before the Nunn Amendment was enacted for fiscal

year 1986.

Program Packages

Informal schemes have also been used to encourage

codevelopment by governments, including program packages and a variant called the Family of Weapons.

The program package concept brings together a variety

of possible collaborative efforts, and usually several

partners. A package may include coproduction as well as

codevelopment. In recent years there has been considerable interest in Europe in package deals, especially because

of their potential to provide a fair return (or Juste Retour)

in terms of development and production work which in

turn provides domestic income and employment. Packages have been organized around a single major program

that had either a planned evolution so that participation

can vary at successive stages, or has included a number of

different (but related) systems, such as the Family of

Weapons.

In the Family of Weapons concept, complementary

mission deficiencies are identified, and one or more

participating nations agree to pursue solutions to each

under separate programs (e.g., one group of nations

designs a long-range air-to-air missile and another group

designs a short-range missile). The participating nations

make tentative agreements to buy or produce the resulting

systems, and refrain from duplicating the R&D. The

family concept has been used repeatedly in Europe, but it

has had a difficult time in the United States due in part to

fears that U.S. industry will be cut out of key technology

areas for a generation and the U.S. military will be stuck

with second-class weapons. Central to the concept is the

belief that some of the shortcomings of single-system

collaboration can be overcome by collaboration that

encompasses several systems in a specified functional or

technological area. Only one transatlantic family continues today, the Air-to-Air Family comprised of Advanced

Medium-Range Air-to-Air Missile and Advanced ShortRange Air-to-Air Missile (the latter now in trouble in

Europe).

A package can also encompass different types of

contributions from participating nations. An example was

the 1983 U.S.-West German deal for the Patriot/Roland

air defense network. The United States purchased Patriot

surface-to-air missiles (designed and manufactured in the

United States) and provided them to the West German

Government. In return, Germany purchased FrancoGerman Roland units for the United States and provided

operations and maintenance for both the Roland and

Patriot units at U.S. bases in Germany. Germany acquired

additional Roland units for its use and committed funds

to other air defense efforts. The United States deferred

R&D recoupment charges on the Patriot.

Direct Commercial Sales

Background

Although normally viewed as strictly a commercial

operation, direct sales often result from agreements

between the United States and Allied governments. Under

the Arms Export Control Act, U.S. companies must

obtain an export license to sell defense equipment, to

provide technical assistance, or to support the training and

logistics operations of foreign governments. License

approval is an implied commitment by the U.S. Government to the deal, and a tacit agreement that it is in the best

interests of the United States. In cases where U.S./Allied

discussions have taken place and agreements reached on

equipment parameters, implying that a foreign policy

determination has been made favorable to the transaction,

gaining approval for the necessary export licenses is

usually straightforward. If, however, the commercial sale

was not preceded by government-to-government deliberations, the licensing process can become extended and

contentious. As Allied governments move away from

dependence on FMS and toward commercial transactions,

direct sales will become a more important aspect of

collaboration in defense technology and weapons. The

bilateral defense trade MOUs are a recognition of this

trend.

Bilateral Defense Trade MOUs

Since the mid-1970s, the United States has entered into

reciprocal bilateral trade Memoranda of Understanding

with nearly every NATO country and others including

Australia, Egypt, Israel, Pakistan, and South Korea. While

varying in scope and coverage and in the degree of

reciprocity required, the agreements waive buy-national

preferences in procurement of defense equipment. Numerous annexes were also negotiated between the United

States and individual signatory countries, augmenting the

MOUs. Agreements have been reached, for example, for

accepting one another’s cost accounting standards, quality assurance standards, test and evaluation procedures,

and selected design standards. These agreements should
100 ● Arming Our Allies: Cooperation and Competition in Defense Technology

make it easier to conduct armaments cooperation programs, including cooperative R&D.

DoD monitors activities under these bilateral MOUs

and through annual meetings with signatory country

officials assesses whether problems exist and, if so, what

to do about them. This is the basic means to police the

bilateral MOU process.

DoD Programs for Testing Foreign Weapons

Two schemes that have expanded Allied industrial

sales to DoD are the Foreign Weapons Evaluation (FWE)

and the NATO Comparative Test (NCT) programs. The

FWE program has been underway since the early 1980s

and NCT resulted from a provision of the Nunn-RothWarner Amendment to the fiscal year 1986 Defense

Authorization Act. The intent of both programs is to test

foreign-developed weapons and systems that have the

potential for meeting U.S. requirements-thus eliminating the need to develop equivalent systems using DoD

funds. Test candidates are proposed annually by the

military departments, which solicit candidate nomination

proposals from their subordinate component commands.

After a preliminary screen at systems commands and a

final screen at service Headquarters, candidates are

forwarded to the Office of the Secretary of Defense, which

reviews each proposal and selects those that are most

promising.

Offsets

Commercial defense sales activities must increasingly

take into account the need to provide offsets. Offsets are

direct or indirect conditions of purchase of foreign

defense equipment enacted by a purchaser. Offsets aim to

increase economic development benefits and reduce the

net balance-of-payments costs of such a purchase. Purchasers may require as direct offsets the purchase or

production in their country of subsystems or components

of the purchased system. Indirect offsets include the

purchase of unrelated goods, services, or supplies. Most

major security partners demand an offset as a condition of

their purchasing a U.S.-designed system. While a complicating factor, the trends are for more rather than fewer

offset demands. Since 1978, DoD’s offset policy has been

straightforward: offsets are the responsibility of selling

companies. DoD has refrained from negotiating or

guaranteeing offsets except under extraordinary circumstances, leaving it up to individual U.S. companies to

negotiate agreements.

Offset demands on U.S. companies have grown enormously and meeting them is not an easy task. Special

offset programs must beset up that often encompass more

than a single program, making indirect offsets a major

element of U.S. companies’ export strategies. Some

critics argue that to meet offset commitments, U.S. prime

contractors are tempted to tilt their subcontracting methods in favor of foreign subcontractors to the detriment of

domestic second- and third-tier companies. Foreigngovernment-imposed offsets have also become more

formalized, with U.S. companies forced to accept legal

offset commitment, instead of the earlier “best-efforts”

arrangements. 5

NATO Methods and Procedures

Under the Conference of National Armament Directors

(CNAD), NATO has some potentially powerful tools for

expanding Allied armaments cooperation. The CNAD has

traditionally provided for information exchange through,

for example, the Service main armament groups. Additionally, procedures have been in force since 1979 which

have introduced a degree of rigor and logic into the review

and selection of candidate programs for NATO cooperation. Three such procedures now exist.

NATO Armaments Planning Review

The first is the NATO Armaments Planning Review

(NAPR), aimed at giving greater coherence and structure

to early cooperative efforts. NAPR provided for a periodic

review of the equipment replacement plans of all NATO

nations, in order to identify where replacement schedules

for similar equipment are sufficiently close to allow

nations to consider joint R&D and procurement efforts.

Attention is focused on opportunities for achieving

NATO standardization and interoperability and on identifying where reasonable compromises can be made in

national plans. NAPR seeks to inhibit a divergence of

national plans that might prevent any possibilities for

cooperation. NAPR data submitted periodically by nations is also compared with priorities for achieving

standardization and interoperability established by the

NATO Military Authorities.

Phased Armaments Programming System

NAPR was initially developed by the Independent

European Programme Group and adapted for NATO use.

One of its limitations is that the national data represent a

mature stage of national planning, and attempts to

collaborate are much more difficult at that stage. To

overcome this difficulty, NATO instituted the Phased

Armaments Programming System (PAPS), which focused on reaching multinational agreements at specific

milestones of the life-cycle of an acquisition program.

The overall objective of PAPS is to provide a systematic

framework for promoting cooperative programs based on

harmonized military requirements.

5u.s, Ofiw of Mqe~ ~d B@@, “@s@ of offsets in Defense-Related Exports: A hmmaq of the First Three Annual Reports, ” December 1987.
Conventional Armaments Planning System

The newly introduced Conventional Armaments Planning System (CAPS) focuses on defining national military requirements at the earliest possible stage (i.e., before

national commitments are made) with a goal of reaching

agreements on the needs and timeframes through a formal

NATO process. The concept calls for a continuous

dialogue in which the Alliance keeps nations informed of

its requirements and the nations keep the Alliance

informed about the degree to which those needs will be

met. The expectation is that this top-down approach will

disclose shortfalls in meeting NATO’s requirements and

highlight opportunities for cooperation. CAPS is intended

to:

●

●

●

●

identify priority armaments requirements;

report and correlate national activities, plans, and

programs;

highlight instances of duplication, gaps between

requirements and national activities and opportunities for cooperation; and

measure the performance of nations, individually

and collectively.

CAPS has just undergone a 2-year test and NATO has

agreed in principle to implement it.

NATO Infrastructure Program

One final tool available within NATO for pursuing

armaments cooperation is the NATO Infrastructure Program. Infrastructure was initially conceived 40 years ago

as a means to obtain, through common funding, the

facilities necessary to support wartime operations for

NATO’s forces. Requirements come from proposals

developed by the NATO Military Authorities and are

staffed by the NATO Military Committee and reviewed

by civilian bodies (i.e., the NATO Infrastructure Committee). After a rigorous process of program definition and

justification, common funding is approved for procurement.

Starting in the 1960s, a significant portion of the

Infrastructure Program was dedicated toward acquiring

communications, command and control, and information

processing systems. While the Infrastructure procurement

rules are antiquated, especially for sophisticated equipment acquisition programs, NATO has succeeded in

acquiring a number of complex and state-of-the-art

systems. There are several advantages to this process: the

programs are always closely tied to military requirements,

multinational industrial teams always bid competitively,

common funding is available, and significant technology

and know-how are transferred among the winning contractors and to the staffs of the host nation. Some of

NATO’s largest and most successful cooperative programs have been funded by the NATO Infrastructure

budget, for example, the NATO Air Defense Ground

Environment, the NATO Integrated Communications

System, and the on-going Air Command and Control

System.
Appendix C

Japanese Defense Policymaking and Industry

Security Policymaking: The Players

Defense policies are formed by committee in Japan;

they are not strictly the domain of one agency.1 While the

U.S. Department of Defense does not have total control

over the formulation of American security and defense

policies, DoD is nevertheless the lead agency in articulating the nature of, and appropriate response to perceived

security threats facing the United States and its allies.

Such is not the case in Japan. The Japan Defense

Agency (JDA) occupies a secondary station in the overall

security bureaucracy. It is not a major cabinet position,

but rather a secondary state agency. Officials on detail

from the Ministries of Foreign Affairs (MOFA), Finance

(MOF) and International Trade and Industry (MITI) are

involved in key decisions in policy planning and procurement.

Although JDA is the lead agency in drafting defense

policies, those policies are only part of a broader security

policy structure for which the Ministry of Foreign Affairs

takes primary responsibility. Thus, JDA struggles to keep

its defense policies from being subjugated to MOFA

security policies in the bureaucracy.2 Policy disputes are

resolved through the Security Council, consisting of the

finance minister, foreign minister, chief cabinet secretary,

the chairman of the National Public Safety Commission,

and the directors general of the defense and economic

planning agency. The prime minister chairs the Security

Councils

Given the differences in interests and perceptions

among various agencies and ministries, it is understandable that Japan’s overall approach to security would also

differ from that of the United States. What are those

interests and perceptions, and their importance to the

security policymaking structure?

Japan Defense Agency

Given JDA’s status as a junior partner in its own

domain, an important bureaucratic priority is to establish

itself vis-à-vis the most powerful ministries involved in

defense policy formulation. JDA’s position in this process

forces it to view policies in terms of how they will affect

its prestige as an agency and its bargaining power relative

to the bureaucracy. This is particularly true in the

uniformed services which, because of Japan’s historical

experience, policymakers and voters treat with suspicion.

Ministry of Foreign Affairs

In the broadest context, MOFA is the most important

spokesman for security policy in Japan. It defines security

broadly and in international terms to include suitable

defense spending levels for Japan, the nature of the Soviet

threat, appropriate procurement for the Self-Defense

Forces (SDF), and the role of Japanese aid programs in

enhancing regional and global security.

Despite the general Japanese willingness to identify the

Soviet Union as the principal security threat in Japan,

Japanese officials differ on the nature of and appropriate

response to that threat. For example, some MOFA

officials speak of the ‘‘Soviet threat’ with U.S. relations

in mind. The implication is that Japan gains favor with the

United States, and thus experiences less pressure in other

policy areas, as a result of its support of the American

perception of the Soviet threat.4 This demonstrates the

primacy of the United States in MOFA’s overall policy

priorities. The 1983 exchange of notes on defense

technology transfers, for example, has been interpreted as

a means for the Japanese Government to strengthen ties

with the United States and reduce immediate pressures on

the economic front.5

l~s ~ction of app. c is wPfiy on info~tion drawn from the following sources: Gregg A. Rubinstein in, Option 2000: Politics and High

Technology in Japan’s Defense and Strategic Future, Ronald A. Mome (cd.) (Washington DC: Woodrow Wilson International Center for Scholars,

1987), pp. 47-60; Paul F. Langer, Japanese National Security Policy :DomesticDeterminants, Rand Report R- 1030-ISA (Santa Moniw CA: Rand Corp.,

1972); John Endicot$ in Committee on Foreign AfYairs, Government Decisionmaking in Japan: Implications for the United States (M%shingtow DC:

Government Printing Office, 1982), pp. 51-70.

%ndicott, op. cit., foomote 1.

3~e sm~~ Comcil ~m ~omti~ted from the Natio~ Defense Council (NDC), The NDC, @e the current Swurity Council, had no aU~Ori~

to involve itself in crisis situations or specific actions by Japanese troops in the event of actual conflict. The Security Council was established in 1986,

incorporating the NDC’S authority and expanding it, largely when the limitations of Japanese Government decisionrnakm“ g were made evident in the

Korean Airlines 007 incident. Although not sitting members, the Minister of International Trade and Industry and the Director General of the Science

and Technology Agency also took part in NDC deliberations and have the opportunity to provide input into the Security Council at the discretion of the

ch- .

dM&e M. Mochiti, ‘ ‘Japan’s Search for Strategy, “ International Security, Winter 1983/84, vol. 8, No. 3, pp. 158-160. A consensus is far from

evident among the writings of Japanese analysts. For a range of views, see Hisahiko Okazaki, A Grand Strategy for Japanese Defense (Lanham, MD:

University of America Press, 1986); Masashi Nishihara, “Soviet Moves in Southeast Asia and the Southwest Pacific lbday, ” paper presented at

Japan-U.S. Joint Study on the Soviet UniorL Nov. 7-8, 1987; and Richard H. Solomon and Masataka Kosak% The Soviet Far East Military Build-up:

Nuc/ear Di/emmas and Asian Security (Dover, MA: Auburn House, 1986).

s’ ‘what Ever Happned to DefenX Technology Transfers?, ’ JEZ Reports, No. 30A, Aug. 7, 1987.

–lo2–
Appendix C—Japanese Defense Policymaking and Industry ● 103

Ministry of International Trade and Industry

Although MITI is a commercial and industrial ministry, it is an important player in the defense and security

policymaking framework. Furthermore, it is likely that

MITI’s role will strengthen over the coming years because

of the security-economic linkage evident in Japanese

policymaking and the growing importance of dual-use

technologies to overall defense production. MITI exerts

influence through the Security Council, its Aircraft and

Ordnance Division, and through seconded officials in

JDA’s equipment bureau, whose director general invariably has served previously as MITI Aircraft and Ordnance

Division director.6

Ministry of Finance

The Ministry of Finance has been a critical player in

defense and security decisions throughout the postwar

period, particularly with the articulation of the “minimum

necessary defense’ policy. The policy outlined in the

early 1950s restricted defense expenditures due to the

need to rebuild the domestic economy, suspicion of

militaristic revivals after the war, and the protective

presence of U.S. forces in Asia. A combination of

economic growth and conscientious restraints on spending brought total defense expenditures from 1.78 percent

of gross national product in 1954 to under 1.0 percent in

1963. Spending hovered around the 1 percent level for the

following 27 years, although the 1 percent limit, formalized in a Miki cabinet decision of 1976, was dropped in

1987. 7

While concern with a specific GNP/defense spending

ratio is not a major fixation at the ministry, restraining

total defense spending is still an article of faith at MOF.

The broader notion of security to MOF means fiscal

soundness: without a stable government and sound fiscal

policy, it would be impossible to have any domestic

economy at all, much less a defense establishment, Thus,

further spending on defense must be defended in terms of

its positive impact on the domestic economy.

Politicians

Political support for defense in Japan is mixed, There

are few spokesmen for defense policy issues,8 and defense

is not an area in which politicians can secure constituent

support. This encourages politicians to focus instead on

the patronage aspects of defense policies, most evident in

the income and employment generated by large procurement contracts.9

Domestic Industry

Domestic industries, especially the larger firms such as

Mitsubishi Heavy Industries (MI-H), are looking to

defense for future growth. Industry demonstrated significant influence over defense policy and procurement

decisions in the FSX case, where only high-level political

intervention kept the project from becoming a totally

domestic effort.

Defense and Security

Japanese security policy rests squarely on economic

foundations. 10 The Yoshida doctrine, a broad policy

approach implemented by Prime Minister Shigeru Yoshida

in the immediate postwar period, emphasized economic

recovery over military growth. That policy has dominated

Liberal Democratic Party thinking and is widely embraced by the general public. Such a policy, however,

does not mean that the government is uniformly opposed

to military spending or to expanding procurement orders.

One analyst notes that:

. . . minimally, economic security is associated in Japan

with the maintenance of a stable supply of raw materials

and access to foreign markets. Maximally, the concept is

associated with control of production for domestic needs

whenever possible.11 

Policymakers are inclined to support defense-related

spending when it has an identifiable and positive impact

on the domestic economy. It is not just the deployment of

weapons that makes Japan secure, but also their strong

domestic production.

Higher defense spending can also satisfy the diverse

interests of other players in the security policy maker

arena. For MOFA, unrestrained increases would pose a

serious diplomatic problem, but measured increases both

help the ministry counter charges of a free ride on defense

and demonstrate that Japan is contributing more to the

burden of regional defense. MITI’s desire to stimulate

critical industrial sectors also can be satisfied through new

procurement programs, provided they do not overwhelm

industrial capabilities or divert resources from other

civilian sectors. Even MOF can tolerate spending in6V1~iom of Jqan’~ ~onofic fi~ and ~=fity role we OUflined ~ the my 19!38 report~i~o~ ~~e~ra~~ ~kyo: Tsusho Sangyo Choti, 1988),

prepared by a special panel that included academics, corporate representatives, and think-tank members. The report is significant, among other reasons,

for its frank assessment of security and economic matters.

7RwWch ~ti~te for peam ad s~~~, Asian Secun’o 1980 (Tokyo: Nikkei Business Publishing CO., 1980), pp. 193- l%; JaP~ Defe~e Agency,

Defense ofJapan 2970 (Tokyo: Japan Defense Agency, 1970), p. 97; Japan Defense Agency, Defense of Japan 1987 (Tokyo: Japan Times Co., 1987),

pp. 153-155; yomiuri Shimbun, U.S. editioq June 14, 1988.

8T~hi ~owchi and Tomoaki Iwai, zo~ugiin n. Ke~yu (’rokyo: Nihon Ke~ shimbuIIs@ 1987), pp. 105ff; 209-210.

~bid.

l~or ~exm~ation Ofthe ~tme~tiomhip in Japan betvvmn economic and security issues, see U.S. House of Representatives, Committee on WaYs

and Means, “East Asia: Challenges for U.S. Economic and Security Interests in the 1990s, ” Committee Print 10WO, IOOth Congress, 2nd sess., Sept.

26, 1988.

1 l~wond ~wu Lib~ of Congress, Congressional Research Service, “Japan: prospects for Greater Market Opemess,” June 26, 1989, p. 9.
104 ● Arming Our Allies: Cooperation and Competition in Defense Technology

creases if they are structured to maintain the appearance

of a low overall resource commitment to defense. 12 Table

C-1 gives Japan’s defense budgets since 1955.

Japan’s Defense Industry and Market

Key Japanese corporations, most of them with links to

defense production in the pre-war and World War II

period, have played an important role in defense production and procurement decisions throughout the postwar

period. Companies like Mitsubishi Heavy Industries,

NEC, Kawasaki Heavy Industries (KHI), Toshiba, and

Mitsubishi Electric Co. (MELCO) have won defense

contracts worth billions of dollars for tanks, naval vessels,

military aircraft, heavy artillery, radar systems, and

missiles. In keeping with longstanding policy, Japanese

firms now satisfy well over 80 percent of domestic

weapons and military equipment needs.13 JDA and

MITI’s Aircraft and Ordnance Division emphasize domestic procurement whenever feasible, opting only when

necessary for licensed production in Japan of foreign

systems. JDA spends more than 80 percent of weapons

funds internally, despite the potential cost advantages of

direct purchases from abroad.

Other reasons for the emphasis on local production

include the desire to develop new domestic markets, the

need to enhance the domestic industrial technology base

through infusions of military related technology and

production, the desire to reduce dependence on the United

States, and the hope of maximizing policy and marketing

options by generating indigenous systems.

Most Japanese defense contractors are multifaceted

companies, which produce mainly civilian goods. Defense production is expanding but accounts for only 0.5

percent of Japan’s total industrial output,14 and defenserelated sales represent small (though growing) percentages of total sales for most companies. For example,

military equipment comprises only 15 percent of MHI’s

total sales.15

The defense market is highly oligopolistic. The top 5

contractors account for over 50 percent of total contracts

and the top 10 garner 65 percent (see table C-2). MHI has

been and remains by far the most important contractor,

accounting for one-fourth of all defense production over

the last several years and the Mitsubishi group as a whole

accounts for an even higher total. The concentration of

defense sales in a small group of highly integrated,

prestigious, and influential firms presents opportunities

Table C-l-Japan’s Initial Defense Budget, Fiscal

Years 1955 through 1988

Budget Percent change Budget/GNP

Fiscal year (billion yen) from previous year ratio

1955 . . . . . .

1965 . . . . . .

1975 . . . . . .

1980 . . . . . .

1981 . . . . . .

1982 . . . . . .

1983 . . . . . .

1984 . . . . . .

1985 . . . . . .

1986 . . . . . .

1987 . . . . . .

1988 . . . . . .

134.9

301.4

1,327.3

2,230.2

2,400.0

2,586.1

2,754.2

2,934.7

3,137.2

3,343.6

3,504.0

3,652.0

1.78

1.07

0.84

0.90

0.91

0.93

0.98

0.99

0.997

0.993

1.04

1.013

SOURCE: Japan Defense Agency, “Defense of Japan, 1988.”

for influencing government research, development, and

production decisions.

Dual-use technologies that are applied to defense from

the commercial sector are becoming increasingly important in defense production strategies, as they are to the

overall Japanese economy, In many respects, Japan’s

defense industry is more significant for its future potential

than for its present capacity.

Defense sales dominate certain industrial sectors—

over 80 percent of the value of Japanese aircraft production goes to the Self-Defense forces-and play an

important role in electronics. Past attempts to develop

commercial aircraft have been largely unsuccessful. In the

1980s the government and industry emphasized coproduction and codevelopment with foreign firms, in both

military and civilian projects. In addition to collaboration

on military aircraft, Japanese firms have entered into joint

ventures with the Boeing Co. for the Boeing 7J7 and the

V-2500 international aircraft engine consortium led by

Rolls-Royce and Pratt & Whitney. Neither venture has

been a commercial success,16 and the Japanese commercial aircraft industry remains small compared to U.S. and

Western European counterparts.

Military production has given Japanese firms opportunities to develop airframes and avionics, with less

progress in jet engines. Electronics companies in particular have participated in aircraft production to gain an

additional outlet for electronics technologies used mainly

in civilian products. On the other side, Japanese technology specifically developed for military aircraft, like radar

systems and airframe materials, could have potential

lzMost of jap~’s proc~~cnt is fwcd through special govaumnt accounts that allow acquisitions on a deferred payments basis. wpmctiw

has generated tremendous obligations for future budgets, but it enables MOF and JDA to constrain any given year’s budget to about 1 percent of GNP.

13Boei Nen~n 1989 ~o~o: A=-s~x1989), p. ASO. Li~ns~p~uc~ systems ~e conside~ “domestic” products in thCSC f@rcs.

Wbid.

IsJapan cowny f.fa~book (’rb&o: ‘rbyo IQizai !$himpo~ 1988), p. 726; Jieitai Sobi Netin ~kyo: ~wos~ ha, 1989), pp. 524,

526.

16~c~dJ. Smuek ~d B~@ ~pple, ‘ ‘~fe~ ~~uction ~d ~dus~ Developm~t: me @e of Japanese Ahcraft, ’ MIT-Japan SCienCe

and Technology program Working Paper 88-09, 1988, pp. 34.
Table C-2—Top Japanese Defense Contractors, Fiscal Year 1988

Number Amount Percent

Company ranking of contracts (billions of yen) of total

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

11.

12.

13.

14.

15.

16.

17.

18.

19.

20.

Mitsubishi Heavy Industries . . . . . . . 225

Kawasaki Heavy Industries, Ltd. . . . . 130

Mitsubishi Electric Corp. . . . . . . . . . . 236

Toshiba Corp. . . . . . . . . . . . . . . . . . . . 187

lshikawajima-Harima Heavy

Industries Co., Ltd. . . . . . . . . . . . . . . . 66

NEC Corp. . . . . . . . . . . . . . . . . . . . . . . 365

Japan Steel Works, Ltd. . . . . . . . . . . . 46

Komatsu, Ltd. . . . . . . . . . . . . . . . . . . . 69

Fuji Heavy Industries, Ltd. . . . . . . . . . 45

Fujitsu, Ltd. . . . . . . . . . . . . . . . . . . . . . 203

Oki Electric Industry Co., Ltd. . . . . . . 97

Hitachi, Ltd. . . . . . . . . . . . . . . . . . . . . . 71

Nissan Motor Co. ., . . . . . . . . . . . . . . 49

Daikin Industries, Ltd. . . . . . , , . . . . . 66

Tokyo Keiki Co., Ltd. . . . . . . . . . . . . . 65

Shimadzu Corp. . . . . . . . . . . . . . . . . . 85

Nihon Koki, K.K. . . . . . . . . . . . . . . . . . 80

Cosmo Oil Co., Ltd. . . . . . . . . . . . . . . 271

Kokusai Electric Co., Ltd. . . . . . . . . . . 169

Japan Radio Co., Ltd. . . . . . . . . . . . . 137

364.2

150.3

100.8

83.1

77.4

73.6

31.1

23.6

22.1

16.8

16.4

16.2

15.1

13.2

11.4

10.1

9.1

8.2

7.9

7.8

26.1

10.8

7.2

5.9

5.5

5.3

2.2

1.7

1.6

1.2

1.2

1.2

1.1

0.9

0.8

0.7

0.6

0.6

0.6

0.6

Total . . . . . . . . . . . . . . . . . . . . . . . . 2,662 1,058.3 75.7

of ail defense

contracts

SOURCE: Japan Defense Agency, 1989.

applications to commercial aircraft as well as more

advanced military aircraft like the FSX fighter.

In aircraft production the dominant firms are MHI, KHI

and Fuji Heavy Industries, Ltd. (FHI). MHI is the prime

contractor for the F-15 interceptor and KHI produces the

P-3C antisubmarine surveillance aircraft, both of which

are the mainstays in this sector, FHI plays the primary role

in the production of the AH-l S antitank helicopter. Japan

Aircraft Manufacturing Co., Ltd. (a KHI affiliate) participates in airframe production. Ishikawajima-Harima Heavy

Industries Co., Ltd. (IHI) dominates the market for jet

engines, producing over 70 percent, while KHI and MHI

produce the remainder. KHI also is the prime contractor

for the domestically developed T-4 trainer. Care is taken

to ensure equitable workshares among these firms regardless of which company acts as the prime contractor on any

given project.

Five major shipbuilders supply the Maritime SelfDefense Forces: MHI, IHI; Mitsui Shipbuilding and

Engineering Co., Ltd.; Hitachi Zosen Corp.; and Sumitomo

Heavy Industries, Ltd. Participation in the production of

the U.S. Aegis escort ship offers them new opportunities.

Initially, Japanese companies will only construct the hull,

while the United States will supply the electronics and

weapons systems. However, as noted below, companies

can be expected to try to replace imported components

with domestic systems as soon as possible.

Missile production represents a growing field for

Japanese producers, many of whom produce a number of

missile systems for the military. Taking advantage of

foreign and domestic inputs, companies have developed

systems that replace foreign models and serve as the basis

for related products. Representative of that strategy is the

ASM-1 antiship missile, which was developed specifically to supplant the U.S.-supplied Harpoon. The Defense

Agency is using the technology from this missile in the

current development of the SSM-1 surface to ship

missile. 17

An important licensed production program is the

Raytheon-MHI Patriot, a surface-to-air missile system

whose first unit, a knockdown unit assembled by MHI,

was delivered in 1989 to JDA. Subsequent units will be

manufactured under license by MHI, with Mitsubishi

Electric Corp., NEC Corp., and Toshiba Corp. playing

important roles. Nissan Motors’ aerospace division is

another player to watch in the missile field, not only

because of its role in the Patriot program (it builds the

missile rocket motors for the program) but also because

of its strong role in civilian booster programs and general

corporate emphasis in this technology. Missile research,

design, and production is proliferating into surface-to-air

missiles, air-to-air missiles, antitank missiles, and even

cruise missiles. 18 Missiles thus represent a leading edge of

Japan’s effort to produce wholly domestic models of

advanced weapons.

17J~~~ D~fen~ Agency, D#e~e @.Tapan 19&!l (’Ibkyo: Japan Tfies CO., 1988)$ PP. 138-139.

Is’’ Japan UWS SSM-1 Expertise to Develop cruise Mkile, ” Aviation Week & Space Technology, vol. 128, No. 12., Mar. 21, 1988, p. 59.
106 . Arming Our Allies: Cooperation and Competition in Defense Technology

In the Japanese defense market, there are rarely

clear-cut winners and losers in procurement competitions.

Instead, firms losing out on bids as prime contractors for

major programs often end up with a significant piece of

business as subcontractors. For example, Nissan Motors’

aerospace division sought the prime contract for the

Patriot program in competition with MHI. Mitsubishi

Electric, affiliated with MHI but in this case in competition with that company, favored improvement of the

Hawk over acquisition of Patriot. Both firms received

significant subcontracting roles when the Patriot business

went to MHI. The earlier Hawk competition illustrates

this tendency more dramatically. In that case, MELCO

was locked in competition with Toshiba that was so

intense it ultimately resulted in awarding prime contractor

roles to both firms.

Business and Procurement Decisions

Japanese firms have encouraged the defense buildup

over the past decade. Leading companies have pushed for

an early realization of total domestic arms production, as

evidenced by the stand of MHI in favor of the development of the FSX fighter as a purely Japanese airplane.

They also have advocated lifting the ban on arms exports,

although they have not pressed this in recent years

because of the public’s strong antimilitary views.

Defense production firms are well organized to lobby

the government and cooperate in multicompany endeavors. Keidanren (the Federation of Economic Organizations, Japan’s largest business association), maintains a

Defense Production Committee (DPC) with a membership of over 100 manufacturing and financial fins.

Virtually without exception, the DPC’s chairman is also

the chairman of MHI. The Japan Ordnance Association,

the Society of Japanese Aerospace Companies, and the

Japanese Shipbuilding Industry Association also promote

the interests of their members in the defense field.19 What

is notable about the membership of these associations is

that many members-Sony and Honda, to name only

two--are more commonly associated with commercial

and consumer products, not with weapons production.

Officials of these groups serve on advisory panels to the

JDA, MITI, and other government agencies. Many of

these officials were former government and military

officials, who maintain close ties to former colleagues.

Research and Development

JDA’s Technical Research and Development Institute

(TRDI) is primarily responsible for defense-related research, but its resources amount to 2.5 percent of the

agency’s total budget. A budget of 103.2 billion yen

($715 million) has been proposed for fiscal year 1990, a

12.1 percent increase over fiscal year 1989.20 The Institute has 1,179 employees and operates under a philosophy

of relying on the private sector to the greatest extent

possible to generate new technologies. Unlike the United

States, where the government conducts a considerable

portion of military R&D, the Japanese private sector

conducts the bulk of it. The director of TRDI, Ryozo

Tsutsui, stated that 81 percent of total Japanese R&D is

commercially oriented, implying that the remaining 19

percent is devoted to military applications.21 If this split

is accurate, it suggests that TDRI’s annual budgets are

only a small portion of total Japanese defense R&D, and

that military R&D funding is underestimated.

Japanese companies manage their defense projects in

conjunction with research on civilian technology, thus

opening opportunities for the development of dual-use

technologies. The Defense Agency often facilitates joint

research programs or organizes consortia of corporations

for research in specific areas.22 Some of these consortia

are oriented toward research into advanced weapons

systems. TRDI sometimes carries out preliminary research that it ultimately turns over to the private sector.

Recent government pronouncements appear to have

upgraded TRDI’s role to emphasize research aimed at

developing the most advanced weapons system.23 As the

director general of TRDI said: “Our view is that there is

no black v. white, military v. civilian technology. All

technology is just different shades of gray.”24

Initiating a project does not assure its success, of

course. The 1988 Defense White Paper contains a list of

important, independently developed weapons systems,

including an antiship missile, a main battle tank, and an

l~or asomewhatdat~ but still generally accurate examina tionof business-government interactions in the defense business, see D. Hopper, ‘Defense

Policy and the Business Community: The Keidanren Defense Production Committee, ” J. Buck (cd.), The Modern Japanese Military System (Beverly

Hills, CA: Sage Publishers, 1975), pp. 113-148.

%chael OreerL “Japan Ups R&D Request in Bid to Boost High-Tech Base,” Dqfensel+lews, vol. 5, No. 3, Jan. 15, 1990. One significant aspect

of TRDI’s R&D budgets, like much of Japan’s research efforts in general, is its emphasis on applied research. What is particularly important in this case,

however, is that applied research translates more often into procurement contracts for indusq than into basic research.

The fiscal year 1990 R&D budget targets four major projects for funding: the FSX, testing of a drone jet aircxaft by the Air SDF, the Ground SDF’S

XATW4antitankmissile, and the Maritime SDF’SFCS-3, afire-control system for destroyer class vessels. Funds will also be allocated for antisubmarine

mines and the Thn-SAM antiaircraft missile.

zlNatio~ Science Fo@~on ~est~~ titto~ Jap~~e R&D spending WOWMS to $39.1 billion for 1987. National Science FOUINMOW

International Science and Technology Data Upal#e 1988 (NSF 89-307), Washington DC, 1988, p. 4.

zzJapan Defense Agency, ‘‘SWIIMXY of ‘Defense of Japan 1989,’ “ p. 49.

.

~D@ense of Japan ]98& op. cit., footnote 18, P. 136,

24~~@ on One: ~t=lew ~~ Ryo~ Tw~, ~torg~m~ Tczhnical Reswch and Development Inst.i@te, ” Defense News, VO1. 5, No. 8, Feb.

19, 1990, p. 38.
antisubmarine helicopter, that date back to the late 1970s;

many are still not completed.25 Once initiated, TRDI

programs continue to be funded, indicating the government’s commitment to domestic development. Indeed,

JDA may sometimes delay procurement of cheaper

foreign systems until indigenous counterparts are developed.

Japan has embarked on the ambitious development of

a new fighter support aircraft, the FSX, to replace

outdated F-1s. Although based on the General Dynamics

F-16 airframe, the avionics, computer systems, and other

electronic components will be supplied entirely by

Japanese producers. Additional modifications will be

introduced to the airframe and fuselage. U.S. companies

will receive a 40 percent share of the development and

production work. The costs of the development phase of

the program will be well over $1 billion, high enough that

a major increase in Japan’s defense budget maybe needed

if other important programs are not to be neglected. The

entire program is expected to cost at least $6 billion at

current exchange rates.26

The role that military aircraft development will play in

the future of a commercial aircraft industry remains a

subject of debate, which has been heightened in the wake

of the FSX controversy. But focusing on the issue of

whether technology transferred in military aircraft programs can boost capabilities in the civilian aircraft

industry misses the point. Japanese firms seldom seek

technological infusions solely to enhance a single sector;

rather, imported technology is viewed in the context of its

contribution to multiple sectors and the industrial base as

a whole. This is especially true for those sectors and

technologies identified as key to future economic growth.

Thus, to address these issues in isolation as one-to-one

relationships between individual industries would underestimate Japanese ambitions and capabilities. This has

implications for U.S. policy on international collaboration

in defense technology because a sound policy will have to

evaluate the implications of these programs beyond their

traditional strategic justifications, and even in more

comprehensive terms than their impact on isolated sectors

of the U.S. economy,

Force Modernization and

Domestic Production

JDA currently is in the fourth year of a 5-year force

modernization program that calls for stepped-up procurement of front-line weapons and equipment, especially for

Air and Maritime Self Defense Forces.27 In addition to the

enhancements it will bring to the Japanese military and

the sales opportunities it offers Japanese businesses, the

plan was important for two policy reasons. First, it was the

first defense buildup program to have a status as an

official government plan; previous programs were simply

planning estimates used to assist the JDA in preparing

annual budget requests. As an official plan, the government is obligated to satisfy specific procurement objectives to the greatest degree possible with less regard to

cost considerations.

Second, the enhanced status of the plan led to the

elimination of the longstanding limit on total defense

spending to 1 percent of the country’s gross national

product. Spending levels, although still hovering around

1 percent, are now determined by the procurement

objectives stated explicitly in the 5-year plans. This

approach is likely to remain in practice for the foreseeable

future.

Major procurement and modernization goals of the

current plan are:

Air defense—The Air Self-Defense Force plans to

establish and modernize twelve squadrons of fighter

interceptors. Eight squadrons of F-15 fighters, totaling

187 aircraft, will replace the obsolete F-104s. Approximately 100 F-4s will make up the remaining fou r

squadrons. Japan will modernize the F-4s by adding

newer surface attack equipment and sophisticated air

combat electronic equipment and missiles. The Air

Self-Defense Force will have 13 E-2C early warning

aircraft, and the antiquated Nike-J surface-to-air missile

batteries will be replaced with Patriot missiles.

by the end of the 1986-90 plan. Four existing destroyers

and frigates will be outfitted with U.S.-designed Tartar or

Sea Sparrow surface-to-air missiles. Two of the destroyers are to be equipped with the U.S. Aegis air defense

system. Attack submarines are to total 16 by the end of the

1986-90 @m.

Antisubmarine aircraft—Japan will have a force of

100 P-3Cs, organized into 10 squadrons. The Maritime

Self-Defense Force will have a force of nearly 90

antisubmarine helicopters by 1990.28

‘Ibid., pp. 138-141.

Zbsome obse~ers ~ve es~t~ vastly higher costs, as much as $2-3 billion for development alone, with an additional $6-8 billion for production.

zTThe p~n Ww in~oduced by the Nakasone Government for fiical Y-S 1986-W.

28GW K. Re~olds, Library of Congms, Congressio@ Resmh Service “Japan’s Military Buildup: GOtdS ~d tiomPlishments, ” Report No.

89-68F, 1989, pp. 5-8. This gives an assessment of the current 1986-1990 plan. The defense plans did not set specific goals for improvement of logistics,

but the JDA and Prime Minister Nakasone disclosed in May 1983 that the JDA would seek a buildup of ammunition stockpiles to a level adequate for

1 month of combat (The Dai/y Yomiuri, Tokyo, May 23, 1983; Intemiew with Prime Minister Nakasone on the NHK television networ& May 16, 1983).
108 ● Arming Our Allies: Cooperation and Competition in Defense Technology

Since the early 1980s, defense spending has increased

by a rate of about 6 percent annually; in real terms, the

increase amounted to slightly over 5 percent annually.29

The defense budget reached a level of about $31 billion

annually by 1989 (at the average 1989 exchange rate).

Procurement statistics indicate that Japan is roughly on

schedule in authorizing the purchase of these major

weapons.

30 These should be on-line in the Self-Defense

Forces in the early 1990s.

A debate is in progress within government circles over

the next 5-year plan. JDA reportedly sought the introduction of several advanced systems, including refueling

tankers, over-the-horizon radar, airborne warning and

command systems (AWACS), and small aircraft carriers.

This last element is particularly controversial both for its

force projection implications and impact on the defense

industry. A senior JDA official recently declared, however, that the upcoming buildup program would not

include any plans for it.

Following that declaration, there have been efforts to

reduce the normal time period of the buildup program

from 5 to 3 years. Bureaucrats responsible for preparing

and negotiating the budget object to that proposal,

insisting that the 3 full years are required to get agreement

of relevant ministries to 5-year program goals. Proponents

are said to be pressing for the 3-year approach to allow an

earlier opportunity to reintroduce the more controversial

proposals rejected for the coming plan.

Constraints on Domestic Arms Production

Since Japan’s defeat in World War II, it has been

wrapped in a web of constraints which help explain its

current defense policy.

The first is the widespread pacifist sentiment which

grew out of defeat in 1945. These sentiments are

embodied in Article 9 of the 1947 Constitution, the

now-famous “no-war” clause. Article 9 reads as follows:

Aspiring sincerely to an international peace based on

justice and order, the Japanese people forever renounce

war as a sovereign right of the nation and the threat or use

of force as a means of settling international disputes.

In order to accomplish the aim of the preceding

paragraph, land, sea, and air forces, as well as other war

potential, will never be maintained. The right of belligerency of the state will not be recognized.

It is important to note that these two paragraphs are the

only bona fide constitutional restrictions on Japan’s

defense. The key to present day defense policies lies in

understanding the government interpretations of Article

9 in light of domestic public support and the international

climate. Very few of the policies constructed on the

foundation of Article 9 have been legislated since the

1954 laws establishing the Self-Defense Forces and the

Japan Defense Agency were passed; rather, they result

from a series of cabinet decisions over the last 30 years.

Government interpretations of Article 9 have led to

further restrictions on Japan’s military that have implications for its procurement decisions and defense industrial

strategies. These include the prohibition of conscription

(a cabinet policy based on constitutional prohibitions of

involuntary servitude); restrictions on offensive weapons,

a flexible policy subject to interpretation by successive

governments; prohibition of participation in collective

security agreements, a policy stance based on Article 9

with some legislative basis in the SDF and JDA establishment laws; and, restrictions on overseas troop deployments, a statutory restriction found in the SDF establishment law. Equally famous are Japan’s non-nuclear

principles-the restrictions against possessing, manufacturing, or ‘introducing’ nuclear weapons-issued by the

Sato government in 1968. The government also vows that

it will observe only peaceful uses for space. Japan’s

participation in the Strategic Defense Initiative is considered consistent with this policy.

A historical controversy still lingers over the origins of

Article 9, but there is no doubt that pacifist sentiment in

Japan is strongly embraced today, even while recognizing

the potential military threat posed by the Soviet Union. A

nationwide poll on security issues in July 1988 by the

Yomiuri Shimbun, Japan’s largest daily newspaper,

revealed the perception that most Japanese perceived a

genuine security threat along with enduring pacifism.

Exactly half of the respondents in the poll, published July

12, 1988, felt that there was some or a great likelihood of

Japan becoming involved in a military conflict in the near

future. That concern, however, did not translate into a

strong sense that Japanese must defend their country in

the event of an attack. Only 3.6 percent said they would

join the Self-Defense Forces in that event, with 28.3

percent declaring they would “support’ the SDF. Passive

resistance was endorsed by 23.0 percent and 22.7 percent

declared they would “flee to a safe location.” Under

those circumstances, it is not surprising that over 75

percent of the respondents in a subsequent Yomiuri poll

judged the security treaty with the United States, which

obligates the United States to defend Japan in the event of

an attack, as being of service to ‘some extent or a‘ great

extent’ to Japan.31

2X1 D. Jackso~ uputy A&tit Smetary of Defense (East Asia and Paciilc Affairs), testimony at hearings before the subcommittee on %*

and PacKlc Affairs of the House Committee on Foreign Affairs, Oct. 13, 1988.

%ibrary of Congress, Congressional Research Service, “Japan’s Military Buildup: Goals and Accomplishments,” Jan. 27, 1989, pp. 5-10.

sl$fyo~~ shimb~ Nation~de Pofl: 67% Favor C=nt ~vels for Self-Defense For~s, ” Yomiw” Shimbun, July 12, 1988, international editioq

p. 8,; Yomiuri Shimbun Nationwide Poll on Security Treaty: Expectations on U.S. Coming to Assistance Decline,” Yonuk” Shimbun, Aug. 1, 1988,

lbkyo metropolitan evening editiou p. 6.
Appendix C—Japanese Defense Policymaking and Industry . 109

The second major constraint on defense policy is the

primacy of economic development over rearmament.

This is the so-called Yoshida doctrine, and it remains a

fundamental tenant of Japanese economic and security

policies. However, lucrative defense contracts, like those

in other nations, have been justified for their economic

benefits in a manner that is consistent with that doctrine.

A third point is Japanese reliance on the United

States for defense. The U.S.-Japan mutual security treaty

is a fundamental element of Japan’s security policies.

Japan’s basic defense strategy is to possess sufficient

capability to resist a limited invasion until the United

States could shift its Pacific forces to support Japan.32

This strategy and the treaty that provides the rationale for

its implementation remain important elements of Japan’s

overall security posture, particularly for Foreign Ministry

officials.

During the Nixon administration, both industry and

government in Japan questioned the reliability of the

United States, in the context of its withdrawal from

Vietnam and Southeast Asia, especially as the Soviet

military buildup became more visible. Although the war

in Vietnam was not popular in Japan, support by the

government was viewed as the price for stable bilateral

relations, freedom from economic frictions, and continued viability of the security treaty. When the United States

indicated its willingness to reduce support for the South

Vietnam government, the inevitable question arose in

Japan of whether it would be next, encouraging thoughts

of greater self-sufficiency in defense.33

Recent official statements evidence concern regarding

the ability of the United States to uphold its end of the

bilateral security relationship. The 1988 defense white

paper notes that “although the United States, backed by

its outstanding military and economic strength, continues

to play the major role in the field of international politics,

no one can deny the fact that its position in the economic

field is comparatively declining in recent years. ” Given

that there also is a strong economic component in the

Japanese concept of security, it is not unreasonable to

conclude that policymakers are concerned that the relative

economic decline of the United States could result in a

decline of the United States as a security guarantor as

well.

Finally, there are differing views on the external

threat, The 1976 National Defense Outline (NDO), the

basic position paper governing Japan’s procurement and

defense strategies, was drafted under the assumption that

detente would continue between the United States and the

Soviet Union.34 The NDO was never amended to reflect

the more tense relations between Western nations (including Japan) and the U.S.S.R. during the late 1970s and

early 1980s, even with the Afghanistan invasion and the

KAL 007 incident. Government officials have since

grown less reluctant to detail a specific Soviet threat.35

Willingness to identify the Soviet Union as the

principal security threat was reflected in part by an

expansion of Japanese roles and missions, beginning in

the late 1970s. For example, the Carter Administration

formalized defense guidelines with Japan in November

1978. These called for greater coordination between U.S.

and Japanese military commands, joint planning for the

defense of Japan in case of external attack, stepped-up

joint military exercises, and mutual logistical support.36

Following visits by then-Secretary of Defense Caspar

Weinberger to Japan, former Prime Minister Zenko

Suzuki agreed in May 1981 to assume responsibility for

defending the sea-lanes approaching Japan to a distance

of 1,000 nautical miles, a zone encompassing the waters

between Japan and the Philippines, swinging east from

the Philippines to Guam.37 U.S. and Japanese officials

subsequently completed a joint sea-lane defense plan for

Japanese waters in December 1986. While this plan

remains classified, U.S. officials in 1981 had proposed sea

control missions for Japanese naval and air forces as well

as the capability to close off three critical straits around

q~ne ~sp=tti Fo~i~ Msq ofilcid, former ambassador to Saudi Arabia Hisahiko Okazaki, likens this stance to a John Wawe Western fi Which

the cavalry rides to the rescue of settlers beleaguered by hostile Indians. For a further elaboration of Okazdci’s perspective, see “The Restructuring of

the U.S.-Japan Alliance, ” Btmgei Shunju, July 1988.

33 For a thorough examirtation of Japan’s ambivalent attitudes toward the Vietnam war, see Thomas R.H. Havens, Fire Across the Sea: The Vietnam

War and Japan, 1965-75 (Princeton, NJ: Rinceton University Press, 1987).

34~ N~o~ &feme ~@ tiesthe following assumptions about the international situation and the necessity for self-defense program:

Tk rnajorpowerblocs will continue adiaiogue toward improving relations andmducing the threat of ndearwsq &spite this tren~ regional instability will remain

and the international situatical will continw to k flui~ an equilibrium exists armmg the United States, China, and tk Soviet Union in the area aruund Ja~. these

is Iittte possibility of a full-scale ccmflict between East and West due to the military balance, idudiog the nuclear balance; while the possibility of regicmal C4mflict

cannot be dismissed the U.S.-Japan security smmgermnt helps maktain internatimal stability and prevents full-scale aggresskm against Japan.

Defense of Japan 1976, pp. 3-7.

sSRecmt white *aFs ~ve ~de ~ ~~ong c= ~ ~~~bl~~ the ~is of the Soviet thr~t and, thus, the @~l~tion of contiu~ defense Spend@

increases. See Defense of Japan 1987, pp. 35-37; Dqfense of Japan 1988, pp. 3343; “Warning Shots Fired on Soviet Bomber,’ Kyodo News Service,

Dec. 9, 1987.

36u.s. Congress, Senate Committee on Armed s-ices, ‘‘United States-Japan Security Relationship-The Key to East Asian Security and Stability,’

Report of the Pacitlc Study Group, 96th Cong., 1st sess. (Washington DC: U.S. Goverrtrnent Printing office, 1979), pp. 22-27.

qTAsahi Shitiun ~~o, ~ 28, 1981, and The ~~on Ti~s, ~ch 31, 1981. s= ~so the s~t~ent by ~sis~nts~e~ of Defense Frock

West before the House Subcommittee on Asian and Paciilc Affairs, Mar. 1, 1982.
110 ● Arming Our Allies: Cooperation and Competition in Defense Technology

the country, Tsushima, Tsugaru, and Soya, to potential

aggressors.

38

At the Japan-U.S. Security Conference in Hawaii in

June 1981, U.S. officials put forth additional force

structure proposals. These called for revisions in several

components of Japan’s 1976 defense program. The key

elements were:

. the addition of 4 squadrons of F-15 fighters to the 10

squadrons of modernized fighters targeted in the

1976 defense program;

. an increase in Japan’s force of destroyers and frigates

to 70 vessels with substantial modernization in air

defense and antisubmarinee capabilities;

● an increase in the number of attack submarines to 25

from Japan’s target of 16;

. the establishment of an antisubmarine aircraft force

of 125 P-3Cs, the main antisubmarine aircraft of the

U.S. Navy; and

. the establishment of a 3-month supply of ammunition.

The U.S. Secretary of Defense indicated to the Japanese

in March 1982 that Japan should attain this kind of force

structure by 1990. He declared that such a buildup would

“require substantial improvements in military capabilities and increases in defense spending substantially

greater than the current annual growth rate. ” U.S.

officials who accompanied the Secretary asserted to

reporters that Japanese defense expenditures would have

to increase at least 10 percent annually in real terms in

order to develop these assets.39

38w~~[ ~~t~mm~ ~- 1, 1982, ibid+

swchd Halloran, ‘‘U.S. Aide to Stress Japan ArUIS New @tlayS, York Times, ” Mar. 27, 1982, p. A-3.
Appendix D

South Korea: Goals and Strategy for

Building Defense Industries

Introduction: Defining a Defense

Industrial Strategy

South Korea plays a major role in U.S./Asian collaboration, and while its views of goals and strategies share

some similarities with those of the Japanese, there also

appear to be marked differences, including differences

over the U.S. role over the last 25 years.

Like the Japanese, South Korean Government and

industry leaders seek to increase the percentage of

weapons and military equipment produced locally, but

they do not appear to aim for an independent defense

industry with minimal or no foreign involvement. South

Korean leaders speak of a growing partnership between

South Korean firms and foreign companies, especially

U.S. companies, in producing weapons systems, and they

have outlined three elements of this “partnership strategy.”

One is to develop a significant role for Korean firms as

a supplier of components and parts to major U.S. defense

firms that produce in the United States, South Korean

leaders stress the advantages of Korean firms supplying

components and parts at reduced costs, as major U.S.

defense corporations face declining U.S. defense budgets,

fewer contracts, and a greater need for efficiency and

cost-cutting. This would allow American firms to retain

the leading edge in developing advanced technology

while economizing on standard parts and components

through subcontracting with Korean companies.

South Korea has instituted an offsets policy toward

U.S. suppliers similar to those of Japan and Western

European countries as an inducement to influence U.S.

firms to subcontract for Korean-produced components

and parts.

Exports are a second element of the “partnership

strategy. The South Korean Government and the United

States have been at odds since at least the early 1980s over

South Korea’s desire to export weapons and military

equipment made under U.S. licenses. This pro-export

policy, which contrasts with Japan’s ban on arms exports,

potentially could create a new source of competition to

U.S.-produced weapons in world markets. The U.S.

Government often has vetoed proposed South Korean

sales overseas. Over some periods, more than 50 percent

of applications for third country exports have been denied.

Not surprisingly, U.S. defense firms generally favor such

restrictions.

South Korea hopes to change U.S. policy by helping

American firms gain a more competitive position in the

world arms market through coproduction of weapons with

South Korean industries. In their view, U.S. companies

should be attracted to South Korea because of its lower

production costs, which will become increasingly important as the world arms market shrinks in the 1990s (if

East-West tensions decline fundamentally and regional

conflicts continue to abate), and as European and Chinese

arms manufacturers continue to cut into traditional U.S.

markets, such as Southeast Asia, the Middle East, and

Latin America. According to South Korean spokesmen,

U.S. firms would control the marketing of weapons

manufactured inside South Korea under coproduction

deals.1

A U.S. role in developing of Korean aerospace industry

constitutes the third element of Seoul’s partnership

strategy. The Seoul government’s Aerospace Industry

Development Plan calls for South Korea to be a serious

participant in the world aerospace market by the year

2000. The strategy for achieving this appears to be

two-fold:

1. building up the role of South Korean companies as

suppliers and parts to major aircraft manufacturers in

the United States and possibly Western Europe, and

2. bringing these U.S. and European firms into collaborative arrangements for coproduction of aircraft and

broader support for the Korean manufacturer of

components or entire systems.

Again, South Korea seeks to attract U.S. aerospace

company participation with prospects of lower production

costs and thus a more competitive position in world

markets.

South Korean Government and industry leaders clearly

expect that the coproduction of the FX fighter plane will

be a first step toward the aerospace business. The

government’s selection of the U.S. F-18 fighter over the

F-16 had a military rationale (the South Korean Air Force

reportedly favored the F-18 because of maneuverability

and armaments), but the government also reportedly

viewed McDonnell Douglas as better suited to assist

South Korea’s aerospace industry than General Dynamics, the producer of the F-16. McDonnell Douglas’ sales

approach to the government stressed the company’s

production of a full line of military and civilian aircraft

and helicopters, the future purchase of Korean-made parts

for McDonnell Douglas helicopters, and broader assisIpmk YOW.Kmw 14RC)IC.U.S. Def~se Industry Cooperatio&Past Achievements and Fume ~kst ‘‘ paper presented at the Fourth ROK-U.S.

Defense Industxy Conference, Jan. 16, 1990, p.5.

–11 l–
112 ● Arming Our Allies: Cooperation and Competition in Defense Technology

tance “designed to transfer key technologies to Korea in

an efficient, building-block approach.”2

Korean industry spokesmen view the role of McDonnell Douglas as assisting South Korean participants in the

FX project to design and plan future aircraft. An official

of Samsung Aerospace Co., the main South Korean

participant in the FX project, has stated that the U.S.

partner in FX coproduction will be asked to assist

Samsung in designing an” interim aircraft” which could

be a light transport aircraft, a helicopter, or a sub-sonic jet

trainer. 3

The Samsung officials also gave a broader set of

objectives in the development of an aerospace industry:

reaching parity with the developed countries in the

manufacture of airframes and engines by the early part of

the 21st century; and reaching, sometime after that, parity

in the manufacture of avionics and other specialized

systems and in the development of advanced systems.4 He

also made clear that government, industry, and the

scientific community would work together towards these

goals.

Motives Behind the Partnership Strategy

South Korea’s partnership strategy stems from a basic

motive to maintain a viable domestic defense industry.

Long-term South Korean thinking envisages a completely

independent defense production capability without foreign participation. Even that, however, is tempered by the

uncertainty of Korea’s security situation in the next

century surrounded as it is by three big powers, China,

Japan, and the Soviet Union, all of which historically have

had aggressive designs on Korea. South Korea thus may

well seek a long-term security link to the United States,

which undoubtedly would influence defense industrial

policy.

The formidable North Korean military threat and

possible U.S. troop withdrawals in the future provide

strong reasons to South Koreans for the development of

a viable defense industry in the nearer term. A “viable

domestic defense industry” apparently means one that

can provide the essential needs of the South Korean armed

forces, produce more advanced systems, and be economically profitable.

South Korea already has made some progress toward

fulfilling domestic military requirements. By the mid1980s South Korean industries were turning out a wide

array of combat equipment. Major items were the K2 rifle,

the Hyunmu surface-to-surface missile, 155mm selfpropelled howitzers, destroyers, fast attack patrol boats,

the 500MD helicopters, and the F-SE fighter aircraft. By

the end of the decade, the Type 88 tank was rolling off

South Korean assembly lines. There presently are 100

major defense firms designated by the government and

several thousand subcontractors involved in producing

military equipment. Nevertheless, by 1990 domestic

firms supplied only 55 percent of the arms purchased by

the South Korean Government, and much of this was

produced under licensing arrangements with U.S. firms.

The Seoul government imported the rest, mainly from the

United States. Dependence on imports is especially

important in aircraft, missiles, and communications

equipment.

South Korea lags far behind Western countries and

Japan in defense research and development. In contrast to

the situation in Japan, South Korean firms have not yet

devoted large resources to military R&D and South

Korean defense budgets in the 1980s have devoted only

about 1.6 percent of expenditures to R&D. The Government hopes to encourage industry to engage in meaningful R&D, but for the foreseeable future, South Korea will

remain dependent on foreign technology.

Creating a profitable defense industry has proven an

even more difficult goal. South Korean defense firms

have operated at below 60 percent of capacity for most of

the period after 1984. Government procurement has not

been sufficient to bring about a more efficient utilization

of production capacity, a situation that will continue,

especially since the emergence of a more democratic

political system in 1987 has produced political pressures

on the government to spend more in the civilian sectors

and restrain defense budget increases.

Herein lies the pressure to export, either as suppliers of

components and parts to Western defense firms or as

suppliers of entire weapons systems to developing

countries. The goal of exporting is key to understanding

South Korea’s partnership strategy. Foreign participation

will enhance the range of potential arms exports, and the

involvement of American firms in coproduction would

help break down U.S. opposition to the overseas sales of

U.S.-designed weapons and equipment.

Preference for U.S. Participation

South Korean Government and industry leaders clearly

prefer to collaborate with U.S. firms. Security is a primary

consideration. The North Korean military threat is indeed

formidable: North Korea possesses armed forces of over

1 million, an Army of over 800,000,540,000 reserves that

can be mobilized within 12 hours, 3,500 tanks, and over

4,000 heavy artillery pieces and rocket launchers. The

bulk of North Korean ground and air forces are positioned

2D~on Darlin and Andy paSZtOr, ‘‘Seoul Picks McDonnell Douglas to Build Fleet of Jet Fighters in $3.4 Billion Deal, ” Asian Wa/1 Street JournuZ

Weekly, Dec. 25, 1989, p. 19; Jeff Shear, “Congress Huffs, Puffs as Seoul Seeks to Build Fighter Planes,” Washington Times, Oct. 12, 1989, p. C-1.

3~~o&m, C(ROK.US c~p~tive~op: KFP and I-I X,’ paper presented at the Fourth ROK-US Defense Industry Conference, Jan. 16, 1990,

pp. 13-14.

%id., pp. 12-13.
Appendix D--South Korea: Goals and Strategy for Building Defense Industries ● 113

near the demilitarized zone. South Korea’s defense

problems are complicated by the location of Seoul, only

30 miles south of the demarcation line.

It is not clear whether North Korea’s future policy will

be influenced fundamentally by the changes in Eastern

Europe and the Soviet Union. Clearly, the North Korean

leadership feels the impact of the changes, but its reaction

has been to reject them and maintain the rigidly totalitarian system of leader Kim Ii-sung. The regime apparently

views the post-June 1989 political repression in China as

a favorable development, countering the trends in Eastern

Europe and the U.S.S.R,

The South Korean Government, therefore, still sees a

prolonged, North Korean threat, and it continues to seek

an American military presence in South Korea as a

counterweight and deterrent to it. Moreover, the integration of U.S. and South Korean forces on the peninsula

provides a rationale among South Korean and U.S.

military leaders for common weapons systems.

In addition, there are strong precedents for U.S. support

of South Korea’s defense industries, The U.S. Government offered over 800 technical data packages to South

Korean firms from the early 1970s until 1986, and over

100 were utilized. These provided data necessary for the

Korean companies to set up facilities and equipment to

manufacture specific types of weapons and equipment,

U.S. Foreign Military Sales credits helped to finance the

establishment of production facilities.

Licensing and coproduction agreements emerged in the

1980s. Weapons produced under these arrangements

include the M109 howitzer, the F-5E fighter, and the

500MD helicopter, motors, machine guns, communications equipment, and small arms. The K-88 “indigenous

tank,’ was designed with help from General Dynamics.

Despite this preference for the United States, in the

future U.S. systems will probably not be automatically

selected. European defense firms have begun to bid hard

for business in South Korea, and this likely will increase

in the 1990s. If European firms and governments are

flexible on issues like technology transfer, exports, and

offsets, their attractiveness to the South Korean Government and industry could present a competitive challenge

to the United States. The recently concluded deal for

South Korea to acquire German submarines (which may

involve coproduction) is indicative of the emerging

European role in South Korea’s acquisition of weapons

and equipment.

The Emerging U.S. Debate

The proposed coproduction of the FX fighter has

opened a debate in the U.S. over the extent to which the

United States should support South Korea’s defense

industries.

Proponents of the FX deal, including executives of

General Dynamics and McDonnell Douglas, argue that

they already have fighter coproduction arrangements with

a number of other countries and that U.S. firms will be

able to stay well ahead of any potential competitors in the

production of advanced fighters. They warn that South

Korea may turn to European aircraft producers if the FX

coproduction proposal does not materialize. Finally, they

assert that the prospects of declining U.S. defense budgets

make cooperative deals with foreign companies necessary

for the financial health of the U.S. military aircraft

industry.5

Critics of the deal argue that the proponents may

underestimate South Korea’s ability to develop an indigenous fighter by the end of the century if it is able to draw

on the technology and production know-how of an

advanced U.S. fighter. They also assert that even an

inferior South Korean indigenous fighter could cut into

U.S. markets in developing countries because of lower

prices.

The proponents and critics have clashed, too, on the

deeper issue of the role of the U.S. aircraft industry in the

globalization of aircraft production in the 21st century. In

the case of South Korea, critics accuse U.S. firms of being

willing to help that country develop a full-fledged defense

and aerospace industry, first by producing parts for

aircraft and other weapons systems manufactured in the

United States and then by producing aircraft in South

Korea itself. McDonnell Douglas and General Dynamics

may represent the view of other major American defense

companies when they assert that U.S. companies must be

involved in the globalization of aircraft production. They

cite profits to be gained from such assistance to countries

like South Korea (in contrast to a likely shrinking U.S.

market) and cost benefits in shifting the production of

components overseas.

In the aftermath of the bitter dispute over the Japanese

FSX fighter, the emerging debate over the South Korean

FX fighter may clarify the differing views of U.S. defense

companies and opponents of such deals: the former argue

for global interdependence and the ability of U.S. firms to

prosper in that environment, and the latter argue that

interdependence will cause American companies to lose

their competitive advantage, and that self-sufficiency will

ensure a continuation of American supremacy.

5Jeff Shew, op. cit., footnote 2.