Does The Defense Industry Need To Be Restructured?

Issue Brief

Last summer the Defense Science Board issued a study entitled Creating an Effective National Security Industrial Base for the 21st Century. It warned that a crisis is coming because America’s military is not able to tap the full range of suppliers possessing cutting-edge technology, and argued that the government should dismantle barriers impeding access to non-traditional suppliers both at home and abroad.

Although the study is full of shallow clichés about economic globalization and military transformation, it does raise two important issues. First, it contends that the U.S. defense industry consolidated too much in the 1990s, leaving an insufficient number of players to sustain the benefits of competition. Second, it argues that the United States is losing its edge in critical technologies, and therefore the defense department must be able to buy more of its equipment from offshore sources.

The science board is at least partly right on both fronts. Concerning defense-industry consolidation, the government promoted mergers among defense companies when the cold war ended because projected levels of demand were inadequate to maintain a big and diverse defense industrial base. Consolidation of the sector seemed inevitable, since the nation had not possessed a big defense industry prior to the cold war, and in the absence of an urgent threat it might not have one in the future either. So the industry necked down to half a dozen defense conglomerates supported by two dozen major subcontractors.

Nobody anticipated at the time that military demand would recover as quickly as it did after 9-11. Now policymakers are complaining there isn’t enough competition if military-technology purchases are confined to what’s left of the defense industry. The problem with this complaint is that defense is a boom-and-bust industry, so it’s not clear the sector can sustain more than half a dozen big players over the long run. With the defense business headed into what looks like another bust, opening the door to non-traditional suppliers might weaken the only companies that are truly committed to the military customer.

The other issue — that America is losing its edge in critical technologies — is a more serious concern. The United States began running a trade deficit in advanced-technology products for the first time in 2002, and the deficit has tended to grow with each passing year. A portion of the shortfall comes from domestic companies manufacturing at offshore subsidiaries, but the science board is correct in stating America is losing some of its technological edge. That doesn’t necessarily mean the Pentagon should go with the flow and source offshore, though, because it has traditionally generated much of the demand that sustained emerging tech industries — so going abroad could make the problem progressively worse. Besides, we may find ourselves at war with major trading partners in the future.

Perhaps the best way to deal with the declining-competitiveness problem in military technology is to develop a framework for when going offshore makes sense, taking into account both military and economic considerations. We are talking, after all, about taxpayer money, so using defense funds to build up foreign suppliers at the expense of American workers is problematic. On the other hand, there are several countries such as France, Italy and the United Kingdom where cost-effective solutions to military technology needs are readily available, and no security issues are raised. Unless there is proof of unfair trade practices, the Pentagon should be permitted to source there as needed. What we don’t want is for globalization or transformation to become a pretext for sourcing from potential enemies.