Conference: America and Europe: A Time For Unity, A Time For Vision 21-22 Feb. '97

Panel Four: Sharing Hopes And Ambitions: The Economic And Technological Base Of Western Security "A Framework For Transatlantic Defense Industrial Cooperation" New Dilemmas and New Opportunities

Executive Summary In the post cold-war world, U.S.-European defense industry cooperation must be based upon long-term strategic interests, mutual economic advantage and technological synergy. But two factors are impeding defense industry cooperation: the growing mismatches between U.S. and European military requirements, and distinct patterns of defense industrial consolidation on either side of the Atlantic. U.S. and European governments must overcome these and more traditional dilemmas if they are to cooperate on the development and production of next-generation military technologies that will be the backbone of the alliance's strategic advantage. Today there are few major collaborative efforts underway. The Medium Extended Air Defense System has suffered budgetary setbacks and the withdrawal of a founding member, while the NATO airborne ground surveillance and identification-friend-or-foe programs have suffered from continued disagreements among allied governments. If U.S. and European governments and industry are unable to achieve a number of successful transatlantic collaborative programs over the next decade, the chances of doing so in the longer term are negligible. In the absence of major new defense programs, U.S. and European governments need to place a renewed emphasis on collaborative technology development in those areas where U.S. and European companies both bring valuable expertise to the table. To do so, governments need to overcome not only obstacles to industry collaboration but market imbalances as well. While the cold war's end offers the economic rationale and budgetary opportunity to strengthen transatlantic defense industry cooperation, dilemmas of defense industry consolidation and the requirements-resources mismatch may make cooperation more challenging than ever. The strength of the Atlantic Alliance rests not only upon the political and military structures embodied in NATO, but also upon the military technologies and systems that its members have developed and deployed. There is little argument about the continuing importance to Alliance members of maintaining their technological superiority in a world of more diffuse, but increasingly sophisticated, threats. There is considerable debate, however, as to how U.S. and European governments and industry can cooperate to ensure that there is as little erosion as possible of the Alliance's collective defense technology and industrial base. As the 20th century draws to a close, two sets of centrifugal forces are compounding the traditional obstacles to transatlantic defense cooperation. These are (1) the growing mismatches between the military requirements of the U.S. government and its principal European allies; and (2) the distinct pressures for and patterns of defense industrial consolidation in the United States and Europe. In order to overcome these centrifugal forces, U.S. and European policymakers and business leaders will have to demonstrate both perseverance and imagination. This issue paper will offer some thoughts about how the governments of the United States and its European allies might collaborate to overcome both the old and the new obstacles to cooperation and build a constructive defense industrial and technological partnership in the next century. The State Of Play Before embarking upon recommendations for the future, it is worth ensuring that all members of this panel share as common a perspective as possible towards the benefits of transatlantic defense cooperation and the obstacles that have traditionally hindered putting the theory into practice. Logic for cooperation In the post-cold war strategic and defense economic environment, the desire to support transatlantic political cohesion is no longer reason enough to justify defense industry cooperation. U.S.-European defense industry cooperation must be based upon long-term strategic interests, mutual economic advantage, and technological synergy. It must also recognize some new realities. U.S.-European military interoperability is as important as ever. More joint U.S.-European military operations, including peacekeeping and peace enforcement, place a renewed premium on standardized military equipment. Cooperative development, production and procurement of military equipment is one important means of standardizing the Atlantic alliance's military equipment. Sustaining our technology edge remains a high priority. As defense spending falls, U.S. and European governments place as high a priority as they did during the cold war on maintaining a "technology edge" over any potential adversaries. If defense industry cooperation can produce systems of a high technology caliber, then such cooperation should be encouraged. No one can be the best in all technologies at all levels. While the need for a technology edge is as pressing as ever, U.S. hegemony in high technology across the board is a relic of the past. Moreover, U.S. laws to shield high technology from foreign competition and cooperation can obstruct innovation and increase the price of U.S. defense equipment. By encouraging industry collaboration, U.S. and European militaries can gain access to the most sophisticated systems. Complete autarky in the development and production of defense systems is no longer feasible. The governments of the United States and Europe will find it prohibitively expensive to satisfy all critical military requirements on a go-it-alone basis for two reasons: the spiraling cost of developing new defense-related technologies and the simultaneous decline in defense budgets. Development and production of defense systems on a solely national (U.S.) or regional (European) basis will mean that governments will have to reduce the variety of systems that they can produce and pay higher unit costs for those that they do procure. Cooperation can save money, sustain jobs, and preserve expertise. Industrial cooperation can spread the risks of technology development and provide economies of scale in production and logistics. This sharing of costs of collaborative R&D and production can offer governments the opportunity to proceed with the development and production of systems that, on a go-it-alone basis, might be unaffordable. If such programs are conducted under terms that allow companies to negotiate a fair return in rough proportion to the national investment, then cooperative programs can help governments to maintain employment and technology expertise in areas that otherwise might disappear. Defense spending on both sides of the Atlantic continues to fall. While European defense budgets continue to sink, overall U.S. defense spending is leveling out. But U.S. procurement spending is still shrinking as operations and maintenance becomes an increasing drain on defense dollars. Lower defense spending aggravates the dilemmas of reliance on high-tech while development costs continue to explode. While this creates an economic imperative for government-to-government collaboration and industry cooperation, it mandates that cooperative initiatives provide savings to government. Structural Obstacles While the economic imperatives for defense industry collaboration are clear, a number of persistent barriers to collaboration remain. Many obstacles reflect the different business cultures in Europe and the United States, on the one hand, and deeper structural impediments on the other. Effective U.S.-European collaborative programs must work around these structural obstacles. The Difficulty of Agreeing Upon Common Requirements: Successful collaborative programs depend upon the ability of governments to coordinate their military requirements as well as on the schedules under which they will replace existing military hardware. As procurement budgets wither and governments stretch replacement timeliness, the difficulty of coordinating requirements becomes greater. Conflicting Arms Export Policies: Although U.S. and European governments share a concern about the proliferation of conventional weapons, they have often disagreed about which destination countries constitute threats to global or regional security. Differing arms export policies complicate collaborative programs because they may constrain the number of export markets to which a collaboratively developed system may be sold. Until U.S. and European policymakers can better coordinate their arms export policies, there is no prospect of liberalization of national legislation to facilitate greater defense cooperation. Inconsistency in the United States: Whereas European governments often make multiyear commitments to defense programs, the U.S. legislative process allows the Congress to review each year all weapons programs. The unpredictability of the annual U.S. budgetary review process is a considerable disincentive to companies that are considering whether to enter into a collaborative program. Inconsistency in Europe: There is no cohesive European "actor" that can serve as an interlocutor with the United States on collaborative programs. Although European governments have made considerable progress in identifying common military requirements and in making cross-border programs more manageable, challenges in defining common specifications, managing collaborative programs, and synchronizing procurement timeliness still exist. The Imbalance Between U.S. and European Defense Budgets: The fact that U.S. defense contractors have access to national defense procurement and R&D budgets that are greater than the combined budgets of NATO's European members can act as a structural disincentive to industry collaboration. When a collaborative program may be an option from a cost and requirements perspective, the frequent discrepancy between the size of U.S. and European procurement requirements can make it very hard to build balanced collaborative programs that offer "fair" returns to participating governments and companies in terms of technology development. The Balance Sheet Today there are few major collaborative efforts under way. The Medium Extended Air Defense System has suffered both budgetary setbacks and the withdrawal of a founding member. U.S. and European governments continue to have significant disagreements over important cooperative programs like the NATO airborne ground surveillance and identification-friend-or-foe programs. Furthermore, coproduction agreements like the Apache helicopter have suffered due to perceived imbalances in work and technology sharing and persistent disagreements over technology transfer arrangements. Some commentators argue that European industries will never be full collaborative partners with American defense corporations unless they can achieve similar size and economies-of-scale. For this reason, many policymakers and industrialists in Europe have called for explicit government preferences for European-manufactured defense systems and for greater intra-European purchases of defense goods until European industry can be an effective partner. The persistent imbalance in U.S.-European defense trade only strengthens the hand of those who favor these protectionist sentiments. The emergence of separate and adversarial defense markets on either side of the Atlantic represents the greatest emerging danger to transatlantic defense industry collaboration. New Dangers: The Requirements and Resources Mismatch Governments on both sides of the Atlantic face difficult dilemmas arising from falling budgets and increased demands. Paradoxically, the end of the cold war has resulted not in a peace dividend, but in an operational tempo for allied armed forces that has taxed their readiness and resources. The diversity of emerging threats, peacekeeping duties, rising procurement costs and falling budgets will challenge future force plans. As the allied governments cope with these mismatches in requirements and resources, transatlantic collaborative programs will find it hard to flourish in this chaotic budgetary environment. The United States The priority of the U.S. administration is to put limited R&D and procurement funds into (a) into a small number of major, core programs like the JSF and F-22; and (b) high-tech modernization to enable "combined," joint- and deep-strike operations. While the Clinton Administration pays rhetorical support for coalition operations, the driving military requirements are self-sufficiency where possible and global presence. Current force planning assumes U.S. leadership for all multinational military operations, reflecting the increased participation of U.S. forces in peacekeeping and humanitarian operations. The competing demands of current operations and future modernization are stretching U.S. defense dollars: the Department of Defense simply does not have enough resources in the five-year defense plan to maintain readiness, conduct multiple peacetime operations, and develop and procure a future force structure that supports the two-war strategy. Europe In contrast to the United States, military requirements have yet to be closely coordinated at a European level. This is due in part to the diverse threats that governments like the U.K., France, Germany, and Italy face in the post-cold war environment. Nevertheless, the gradual evolution of Western European Armaments Group (WEAG) and the Joint Armaments Cooperation Organization (JACO, which includes France, Germany, the U.K., and Italy) are a sign of two factors: First, under current budgetary pressures, greater requirements coordination leading to collaborative programs is inescapable for the weapons-producing states in Europe. National self-sufficiency in major weapons procurements is not possible given the cost of new systems and the limited funds available for defense. Second, European armaments collaboration has the added benefit of supporting the emergence of a more autonomous European Security and Defense Identity (ESDI). Broad-based armaments collaboration will provide greater autonomy in future military operations as well as effective sharing of the burden of future coalition military operations with the United States. NATO/Common Requirements: Despite their ambitions for an ESDI, U.S. involvement in crises on Europe's periphery is at the least desirable and, potentially, indispensable for all European governments. This was confirmed in the CJTF agreement at the Berlin NATO summit of June 1996. For the United States, a stronger European pillar in NATO will reduce the burdens on U.S. forces in the post-cold war context. Despite this consensus at the political level, however, the evolution of U.S. and European military requirements appears to pose two problems for transatlantic defense cooperation in the future. First, the continuing European search for greater self-sufficiency in armaments production means that duplication of weapons systems between U.S. and European forces will continue, wasting precious resources. Second, the combination of, on the one hand, Europe's efforts to spend limited resources on expanding their capabilities into satellites and heavy lift (areas where the United States already has extensive investments) and, on the other, the growing U.S. focus on complex operational integration of systems and forces, may lead to an evolution down separate tracks of the armed capabilities of U.S. and European forces that will make coalition operations harder to execute, in practice, than at present. On Separate Tracks: Pressures and Patterns of Defense Industrial Consolidation A further new danger to transatlantic defense cooperation is that there is, as yet, little convergence between the pace and nature of defense consolidation in the United States and Europe. This lack of convergence creates new tensions and new obstacles to transatlantic defense cooperation. The size of U.S. defense conglomerates, benefiting from large R&D and procurement budgets in relation to their European counterparts, means that U.S. defense systems are likely to become more competitive across the board-in U.S., European, and global export markets. Irrespective of the comparative size of future U.S. and European defense conglomerates, the different ownership structures and government-to-company relationships on either side of the Atlantic may raise new obstacles to the establishment of transatlantic cooperative and collaborative programs. Suggested Steps Forward: A Framework For Cooperation Collaborative Programs During this period of defense industrial consolidation, there likely will be only limited opportunities for genuinely collaborative programs. It will be crucial, therefore, to ensure that those that are selected-such as the Medium Extended Air Defense System ( MEADS) and the NATO airborne ground surveillance system-stand the best possible chance of successful completion. In May 1996 the CSIS Atlantic Partnership project proposed that U.S. and European governments establish a Framework Agreement for transatlantic cooperation . The Framework Agreement would insert specific incentives for governments and companies to see worthy collaborative programs through to fruition, by establishing a legislative "fast track" for those collaborative programs that the U.S. government and its European partners consider worthy of support. Under the terms of the Framework Agreement that should be signed by the United States and interested European allies: Governments will coordinate as much as possible their disparate technology transfer and security rules and procedures, so that U.S. and European companies can share technology under normal industry contractual and proprietary rules. Participating companies will take the lead in determining the distribution of work content, technology development, and program management, including arrangements for prime contractorship-in accordance with the parameters for national investment and return that governments have negotiated up front. Governments will take measures to assure stability and continuity for the band of programs through clearly stated funding milestones, including the financial liabilities for government that end their participation outside the predesignated milestones. Governments will agree to an accounting methodology for national contributions to the collaborative program, including an assessment of the impact of currency adjustments. National legislatures will allow participating companies to export the collaborative system without further legislative restrictions to the third country destinations that the executive arms of government have identified and agreed upon in advance. Defense Cooperation In the absence of a stream of major new defense programs, U.S. and European governments need to place a renewed emphasis on encouraging collaborative technology development and prototyping between industry in those areas where U.S. and European companies both bring valuable expertise to the table. Such cooperation will only flourish if the U.S. and European governments can come to a formal agreement to ease technology transfer restrictions between their industries. The development process, especially the concept formulation and predevelopment stages, can take potential partner companies beyond the technology for which they have an export license. Outside clearly structured, specifically "fenced" areas-such as nuclear and cryptographic technologies or electronic counter-countermeasures (ECCM)-companies should not need to obtain an export license just to discuss a program with a prospective collaborative partner. The simplification of export control procedures within the alliance could be undertaken under the following preconditions: Allied companies would first apply to their respective governments for qualifications to receive, in principle, prior approval to export within the alliance; Alliance companies would notify their respective governments after the fact when a transfer has occurred to another NATO company or country; Technologies freely transferred within the alliance could be transferred to an outside destination only with the prior approval of the originating country and a proper export license. Companies that abused this system would lose their "license-free" status. Defense Trade The transatlantic trade in defense equipment, particularly subsystems and components, could be an area for growth over the coming years. Within Europe, recent calls for a formalized arrangement of European preferences in defense purchases have not secured majority support. Within the United States, attempts to strengthen Buy America provisions during the summer of 1996 were defeated, largely with the support of U.S. defense industry leaders who feared retaliation in Europe and are sensitive to the benefits of reciprocal trade. A transatlantic consensus may be emerging that, even if the transatlantic trade of platforms and finished systems remains politically sensitive, budgetary pressures make it impossible for governments or industry to ignore the fiscal benefits of securing the best technologies and products for their defense systems, even if these originate outside the country. The existence of the North Atlantic Treaty and fifty years of defense cooperation should minimize the fear of dependency that tends to accompany any increase in the outsourcing of defense equipment. A formal Transatlantic Defense Trade Agreement that secures formal commitments to defense market-opening may be too hard to secure at this stage. However, the U.S. and European governments must not only continue to counter the inevitable calls for greater defense protectionism that accompany defense consolidation, they should also take proactive measures to open their defense markets to reciprocal trade across the Atlantic. In Europe, governments should strive to create a more coherent and transparent European defense market, providing that any new common external European barriers do not constitute an overall increase in the obstacles facing U.S. defense imports. In the United States, the administration should continue to revise U.S. "critical items" lists and mobilization base restrictions, and extend the exemptions from "Buy America" legislation for allied companies. Discussion Issues What are the near-term prospects for defense industrial cooperation? Will current defense industry downsizing and the resources-budget mismatch doom future cooperative initiatives? Can U.S. and European governments expand collaboration given continued disparities in military R&D and procurement funding and differing size of industrial bases on both sides of the Atlantic? Are we likely to see adversarial defense markets with new protectionist barriers on either side of the Atlantic in the years to come? Or are we likely to see more liberalization of transatlantic defense trade in light of the defeat of congressional efforts to strengthen Buy America legislation last year and the exclusion of formal requirements for European preferences in the new JACO? What effect will competition in global arms markets have on U.S.-European defense industrial cooperation? Are offsets genuinely a hindrance to transatlantic defense cooperation?