Where will Bush stand on Douglas deal?

National security vs. free trade in mulling Taiwan pact

The success of McDonnell Douglas Corp.'s proposed venture with Taiwan Aerospace Corp., perhaps the most intimate relationship launched between an American aerospace company and an Asian government, may ultimately rest in President George Bush's hands.

Under the so-called Exon-Florio law, the president is authorized to ban foreign ownership of a U.S. company when it compromises American security. Thirty U.S. senators sent a letter to Bush last week urging him to order an Exon-Floria review of McDonnell Douglas' plan, announced Nov. 19, to spin off its commercial-aircraft manufacturing division into a new company and sell up to 40 percent to Taiwan interests.

The senators cited many concerns. At the root of some was this notion: that commercial aircraft can have military uses, and a loss of commercial production in America today can erode capacity for military production in the future.

The wings, fuselage, nose and tail of McDonnell's next-generation jet, the widebody MD-12, would be built at a site in Taiwan and assembled with the remainder of the $130 million aircraft's parts at a yet-to-be-named site in the United States.

Aerospace "is a classic dual-use" product, "particularly when you're talking about wing designs," said one mid-level administration official with extensive experience ruling on such issues. "More and more, the technology required to make a state-of-the art commercial aircraft is the same technology required on the defense side."

Bush had not commented on the proposal by press time. Considered a "free-trade" president, he previously has only killed one questioned foreign investment on security grounds.

Officials at McDonnell's Long Beach-based Douglas Aircraft Co., where most of its commercial aircraft are made, downplayed the possibility of flak from Washington.

"We see no issues that will preclude government approval," said John D. Wolf, an executive vice president of Douglas Aircraft. He stressed that McDonnell would retain majority ownership and control over the new company, to be headquartered in Long Beach.

Wolf justified the Taiwan venture, in part, by likening it to the Airbus Industrie consortium that is funded by European governments and manufactures commercial aircraft to compete with McDonnell worldwide. Such joint ventures represent the future of the industry, said Wolf.

Led by Sen. Jeff Bingaman, D-N.M., the worried senators nevertheless said the Airbus example proves that U.S. government subsidies or other help is due McDonnell so it doesn't have to reach for Asian capital "in order to stay in . . . business."

"I think if the president were to look at this, he might come up with some other options," Bingaman told the Business Journal. "Aircraft and aerospace are very strategic industries" from a military-security standpoint, he insisted, while admitting that condemning the McDonnell deal involved "very subjective judgments."

Douglas Aircraft spokesman John Thom insisted, "There is no military or defense-related involvement in this new company."

Nevertheless, commercial airplanes have military uses. Douglas jets were used to ferry American soldiers to the Persian Gulf War this year. The U.S. Air Force buys McDonnell DC-10s and converts them to military fuel-tankers and renames them KC-10s. DC-9's are remade into flying military hospitals called C-9s.

And Douglas civilian aircraft, undoubtedly, have benefited from military technology developed under the same roof. Douglas produces the C-17 troop-transport planes and parts for the KC-10. All its military operations will be separated from commercial by Jan. 1, according to McDonnell.

The U.S. Commerce Department, armed with national-security regulations against aiding the enemy, has killed many proposals to sell military goods abroad. The Pentagon may do likewise. Many industry and government sources quoted in the press last week said McDonnell's claim will likely hold up in Washington. And there is no U.S. law authorizing the president or Congress to stop a non-military deal, even if they believe it harms America's competitiveness or weakens its industrial base.

Theoretically, once McDonnell shares designs with the Taiwanese, the trade secrets move one step closer to a potential competitor, whether in Taiwan or elsewhere. And Taiwan Aerospace was designated by the Taiwan government "to spearhead the further development" of that nation's commercial aviation industry, according to the Taiwanese firm's chief executive, David H. Huang.

"There is not to my knowledge a law that says this should not occur," said Don Crafts, an economist with the U.S. Treasury's Office of International Investment. Treasury leads an eight-department screening panel called the Committee on Foreign Investment in the United States. This group performs the preliminary review of national security-tinged investments and then reports confidentially to the president. The standards are highly subjective.