The Pentagon’s Tanker Plan Seems Disconnected From The Obama Economic Agenda

The United States has lost an average of over a thousand manufacturing jobs every day since the new millennium began. Most of those losses resulted not from productivity gains or other positive trends, but rather from America’s decline as a manufacturing power. During the last 30 years, the portion of the U.S. economy dedicated to manufacturing has been cut in half — from 25% to 12% — while the share of manufactured goods consumed here that were produced overseas has tripled from 10% to over 30%. Not coincidentally, the U.S. merchandise trade deficit rose to unprecedented levels on the eve of the recent recession, and now that consumer demand is recovering that deficit is once again rising.

It didn’t take long for the Obama Administration to figure out that there was a connection between declining U.S. manufacturing activity, rising trade deficits, and America’s need to borrow ever-increasing amounts of money from the industrial countries of East Asia. President Obama now wants to double U.S. exports over the next five years, and he has enlisted every cabinet department in that effort. For example, the defense department is revising trade regulations that previously impeded the ability of U.S. manufacturers to export so-called dual-use items useful in both military and commercial applications. In other ways, though, the Pentagon seems to be out of sync with the administration’s economic goals. A case in point is its plan to hold a new competition for the Air Force’s next-generation aerial refueling tanker.

That competition now looks likely to pit an American-designed and manufactured plane, the Boeing 767, against a plane designed and largely built in Europe, the Airbus A330. EADS, the European parent company of Airbus, has tried hard to obscure the industrial-base implications of selecting its plane, but an editorial in Defense News this week has it right: buying the Airbus tanker would be another big blow to America’s manufacturing sector. Some new jobs would be created by doing final assembly of the European plane at a domestic site, but the net job impact for America would be decidedly negative because the Boeing 767 production line and supplier base would disappear.

Now, if you are one of those academics who views this controversy with Olympian detachment, then the disappearance of all those jobs is just one more example of market forces working their magic — “creative destruction” in the words of economist Joseph Schumpeter. The problem with looking at the tanker contest that way is that Airbus was created outside normal market mechanisms by four European governments, and to this day it relies on subsidies to compete with Boeing in commercial transport markets. In fact, a recent report by the World Trade Organization found that none of the planes in the Airbus commercial lineup, including the A330, ever would have been developed without subsidies today deemed illegal under free-trade rules.

Airbus partisans have been happy to encourage conservative economists in their naivete about how global markets work — with the perverse result that it is often Republicans who rush to the defense of the quasi-socialist Airbus. Boeing has done almost nothing to explain to Republicans that it is the free-enterprise entrant in the tanker competition. But it has pointed out that it is the American company, and the Pentagon can’t even seem to grasp that part of the story. Spending $40 billion to buy military tankers from a European company will hurt America’s industrial base and its trade balance at a time when the U.S. is already running a daily trade deficit of a billion dollars in manufactured goods. And making that choice because Airbus can use subsidies to craft a lower price for its plane — even though that plane costs much more to build and burns much more fuel than the Boeing plane — would simply reward the European company for not playing by free-trade rules. Clearly, the administration needs to do a better job of integrating its military procurement policies with its economic goals.