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Critical assets.

In "Halting the Erosion of America's Critical Assets" (Issues, Spring 1993), Susan J. Tolchin focuses her considerable analytical skills on one of the pivotal national security issues of our time: that of guaranteeing the continued military leverage derivable from America's leading-edge technologies while assuring freedom in the technological marketplace. As usual, Tolchin is on target.

Contrary to popular belief, the nation's defense industrial base is not really a free enterprise system. The former is basically a monopsony (i.e., it has one customer--the U.S. government--and many competing suppliers), sometimes contains monopolies, and does not have the kind of self-correcting forces that would ensure that the nation will have an industrial base that can meet its national security objectives. This being the case, by logic it becomes an issue for government policymakers to determine what form of defense industrial base most effectively serves the nation's needs--an issue that government policymakers have heretofore studiously avoided. The difficulty with the lack of a government role is that it takes decades to build a robust defense industrial base but only hours to profoundly change the world political situation and therefore the need for that base--a murder of a political figure, a surprise attack on a naval base, an unexpected assault across a nation's border, or an attempted coup, to cite but a few examples from this century alone.

Tolchin cites the case of the recent attempted acquisition of LTV's missiles and aircraft divisions by a foreign firm largely owned by a foreign government and backed by a bank largely owned by that same government and the foreign firm in question. As perceived through the eyes of U.S. companies without such public funding, this is not just an uneven playing field, it is one that is hopelessly skewed against the long-term interests of the United States.

But the root problem in this case was not the lack of proper comportment on the part of the foreign firm, or the lack of judicious behavior on the part of the sought-after defense firm. The problem was, very simply, the lack of any stated policy whatsoever on the part of the U.S. government insofar as such matters are concerned. As a consequence of this policy vacuum, it was left by default to the U.S. Bankruptcy Court in New York to decide a major national security issue--until finally the Congress stepped into the vacuum and decisively resolved the matter by restricting the purchase of U.S. defense firms by foreign government-owned companies. The entire episode brought to mind Bismarck's comparison of lawmaking to sausage-making; it was a particularly distasteful process to watch, one sure to cause a loss of appetite.

The bottom line is that if the country is serious about preserving any national defense industrial base, the U.S. government cannot simply take the role of a disinterested observer. Generally speaking, I agree with the notion that the government should not try to pick winners and losers in an open, competitive marketplace. But on the other hand, the government should not permit an environment to exist where there can be no winners within our defense industrial base, only losers.

NORMAN R. AUGUSTINE Chairman and Chief Executive Officer Martin Marietta Corp. Bethesda, Maryland

Susan J. Tolchin's article "Halting the Erosion of America's Critical Assets" skillfully draws together several of the issues and concerns echoed in many General Accounting Office reports. Over the past decade, we too have pointed out the need to determine which technologies and industries are critical to the nation's security and then to gather and maintain adequate information on them. Our work has also indicated the merits of developing a framework for using that information to formulate an action plan or strategy to guard against unacceptable levels of foreign dependency and potential loss of critical industries. We have also raised concerns over technology transfer controls and the industrial base impacts of coproduction and co-development programs, and pointed out the limitations and problems in the criteria applied to decisions on foreign direct investment in critical, sensitive U.S. industries and technologies.

As our institutions, strategies, and policies are faced with the end of the Cold War, it is even more compelling now to refocus and redefine our national security needs and threats and adjust to new global economic realities. Recognizing that a key element of our nation's security is its economic health and competitiveness, the government needs to define its roles and responsibilities and devise a strategy--but it needs to do so carefully without taking over industry's job. Tolchin's point that "the greatest challenge for U.S. leaders is to reconcile the national interest with the global economy, to preserve the nation's jobs, technologies, and profits" is an excellent one in this context. She raises some fundamental questions about how the United States will compete in the world market and offers some thought-provoking solutions.

One of Tolchin's proposals--to collect information in a systematic way on the level of our dependency on foreign parts and components in our defense equipment and on foreign investment patterns in critical U.S. industries and technologies--is something we have also recommended. Although we are not in a position to fully evaluate and comment on the other proposed solutions, they contain concepts that warrant serious consideration by the new administration with respect to critical technologies and industries. Some of these concepts may even be readily adapted to apply to existing programs and institutions.

In any case, it is clear that relying on free-market forces to determine the structure and composition of our critical technological and industrial capabilities is unrealistic. Tolchin persuasively points out the risks of inaction--the government needs to take the initiative in this arena to avoid last-minute reaction to events affecting our critical industries and technologies and to avoid making important decisions without sound and adequate information and analysis.

FRANK C. CONAHAN Assistant Comptroller General General Accounting Office Washington, D.C.

Susan J. Tolchin discusses several episodes that highlight the scant attention that has been paid by the federal government to the larger industrial and technological base that underlies the nation's defense. It is ironic that with the large surge in the defense budget during the Reagan-Bush era, the industrial foundations of our advanced weapons capabilities fared poorly. Not only was any form of industrial policy an anathema, even a defense-related industrial policy was unacceptable.

Curiously, with the final gasps of the Soviet Union as a threat, there emerged concerns that the very basis of our overwhelming military capabilities--technological leadership--was at risk. An early voice of concern was the Defense Science Board (DSB) Task Force on Semiconductor Dependency in 1987, chaired by Norman Augustine, the head of Martin Marietta, who was to play a prominent role in the LTV imbroglio.

During the DSB panel discussions, industry laid out information about the targeted technological focus of Japan and evidence of increasing foreign domination of key segments of the microelectronics industry. After assessing the implications of these trends for the future technology base that the Department of Defense (DOD) would have to draw upon, the task force concluded that despite the fact that the problems identified were primarily in the commercial arena, action in support of this industry by DOD was required. A key element of its recommendations was support for SEMATECH.

As events unfolded, even the national security-based concerns for bolstering this strategically important industry clashed with the position of the administration. Support for an industry, even one so manifestly critical to defense, outside of military-specific developments, was unacceptable. The DSB recommendations were strangled within the administration, even though they had strong backing from Pentagon technologists, and industry had to push Congress for action. When these measures were passed, they met with resistance from the Pentagon's top policy leadership.

Thus, the events described by Tolchin are symptomatic of a pattern of imbalance in attention and focus. The result is that with the inevitable downsizing of military procurement we are faced with a concomitant weakening of our overall national technology base. Now, when there are real needs for integrating defense technology and production into the civil-commercial industrial base, the competitiveness of commercial industry is lagging. It is doubtful that concerted focus on the nation's technology base and industrial competitiveness could have reversed this situation. Much of what has occurred is deeply embedded in structural factors. Policies might, however, have dampened the effects. More important, earlier attention to investment in our critical industrial sectors would have provided a head start on remedying the comparative disinvestment in commercial competitiveness--a key structural flaw.

Tolchin urges that we take action "halting the erosion of America's critical assets." I agree that this is imperative. The Clinton administration now is fostering investments in critical technologies aimed at halting further erosion. But investments, while needed, will take time to effect. In the meantime, what is to be done about the weakened defense industry? Surely more firms will be on the trading block.

Tolchin suggests replacing the Committee on Foreign Investment in the United States (CFIUS) with a more powerful regulatory body. But such measures are essentially damage control. Clearly, the question with investment is whether, as Tolchin suggests, a new government agency is needed to "overcome the infighting that in the United States has arrested the development of critical technologies." From my perspective, interagency squabbling did not prevent sound investment in critical technologies. It was policy at the top that discouraged any notion of such investments.

The current environment calls for achieving defense-civil integration. Since defense sees it in its interest that there be a vital, competitive industrial base to draw upon, it is possible that a cooperative venture among government agencies, as well as between government and industry, can put behind us the "dark times" for the U.S. technology base. We have the prospect that the Department of Commerce, given the mission of revitalizing national competitiveness and working in concert with DOD and other federal agencies, can provide the investment needed. Perhaps Commerce with a mission is the answer to Tolchin's concerns.

RICHARD VAN ATTA Institute for Defense Analyses Alexandria, Virginia
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Title Annotation:response to Susan J. Tolchin, Issues, Spr 1993
Author:Augustine, Norman R.; Conahan, Frank C.; Van Atta, Richard
Publication:Issues in Science and Technology
Date:Jun 22, 1993
Words:1677
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