Article

September 2003

‘Buy America’ Clauses Could Hurt, Not Help

by Ben Stone and Paula Jacox

The “Buy America” provisions included in the House version of the 2004 Defense Authorization Act—and the mostly negative reaction by large and small industries alike—have shed light on a serious issue lurking below the radar screen of the mainstream media: How can the nation ensure the continued existence of a healthy defense industrial base to meet its security needs now and in the future?

“Despite the downturn in the U.S. economy, the defense industrial base in general is healthy, innovative and responsive,” Suzanne D. Patrick, deputy undersecretary of defense for industrial policy, told the U.S. House Committee on Small Business earlier this summer. “Defense is a robust contributor to economic growth.”

Although the defense industry on the whole is healthy—like any industry—it has sectors that are doing better than others. Operation Iraqi Freedom exposed several vulnerabilities. The refusal by several traditional allies to support U.S. actions in Iraq highlighted the risks of relying upon a global defense industry.

The reality, however, is that the defense business today is a global enterprise. The U.S. defense industrial base sells not only to the U.S. military services, but also to other services around the world. Foreign sales add strength to U.S. industry and help promote standardization and interoperability among our allies.

U.S. industry sells much more to foreign customers than the U.S. buys from foreign industry. It supplies most of the tactical vehicles to the British military, and the aerospace sector is the lone bright spot in the U.S. trade balance with the rest of the world.

Some items required by U.S. military services are not produced in the United States, because industry does not find it profitable to participate in areas where capital investments are too high, environmental standards are too tough or the purchases are infrequent.

However, the “Buy America” provisions in the House bill significantly change the Defense Department’s industrial base policy. Under the “Buy America” provisions, the Defense Department would have to buy U.S.-made products even if it had to pay more for them, and companies would be required to comply with a substantial data-gathering exercise.

The cost of defense programs would skyrocket, plant floors across the industry would need to be retrofitted at a huge cost, and there would be less competition, less innovation and fewer new technologies.

Adopting this wholly protectionist approach would serve only the interests of U.S. adversaries. If it is enacted, the likely result would be a Fortress America and a Fortress Europe, and trade wars would ensue. The double-edged sword of globalization and capitalism is that while there are tremendous benefits associated with global trade and specialization, there are also significant risks.

The defense industry competes with other industry sectors for investment, based on a number of economic factors, such as a projected rate of return. The investment community is likely to be concerned about investing in an industry that would be cut off from established commercial sources of advanced technology, forcibly disengaged from the global marketplace and forced to rely on a single customer’s requirements.

No one would disagree that certain sectors are critical to maintaining a U.S. technological and military advantage over its adversaries. Where opinions differ is on identifying the critical sectors and how to fix problems. The question that the “Buy America” provisions attempt to answer is: “Are the areas that are doing poorly critical to U.S. national security?”

Unfortunately, the fix that the “Buy America” provisions apply is seen by most in the defense industry as counterproductive and likely, in some areas, to put them out of business.

The capitalist market model is that some areas of the industrial base will wither and die. This is not a new phenomena—it happened when we went from horse and wagon wheels to tank treads and aircraft. The upside to these changes is that new industries will develop as the economy continues to evolve.

The question before policy makers is whether or not the U.S. can afford—from a national security perspective—to allow sectors to die, or should they intervene. There are numerous instances where intensive management of the industrial base is necessary.

The ammunition industrial base is one such area. As one of the primary factors in sustaining military readiness, the U.S. Army Materiel Command actively works this issue daily.

It is worth noting that the government already has tools to manage the defense industrial base. Title III of the Defense Production Act currently provides the Department of Defense with broad authority to manage the industrial base. However, the funding level proposed for this program in 2004 is only $67 million, significantly less than the $100 million proposed in the “Buy America” provisions. In addition, government-funded research and development can serve to provide a sustained level of funding for critical technology development. Greater use of these existing tools could achieve the results intended in the “Buy America” provisions.

Those provisions are the wrong tools to fix a real problem. Policy makers must ensure that U.S. National Security requirements are driving the train. This may mean that in some instances, protecting an industry from foreign competition is prudent; in others, it may not be.

What the U.S. government needs is a rifle shot approach to each unique situation, not a scattergun approach that, if enacted, would weaken, not strengthen, the U.S. defense industrial base.

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