Globalization and the U.S. Defense Industrial Base: The Competition for a New Aerial Refueling Tanker: What Are the Real Issues?

By Hensel, Nayantara | Business Economics, October 2008 | Go to article overview

Globalization and the U.S. Defense Industrial Base: The Competition for a New Aerial Refueling Tanker: What Are the Real Issues?


Hensel, Nayantara, Business Economics


The growth in the global economy and the trend toward outsourcing have given rise to concerns over the composition and strength of the U.S. industrial base, as well as the degree to which the United States is dependent on other countries for certain goods and commodities. These concerns have appeared across a variety of industries in the dialogue between members of the House of Representatives and the Senate and their constituents, between companies and their employees, and among policymaking representatives of different nations. The dialogue becomes particularly heated when the industries involved are deemed important to national security and to the U.S. defense sector.

The purpose of this article is to examine the concerns surrounding the alleged inroads of foreign manufacturers into the U.S. defense industrial base, as well as the background behind the concerns. In particular, it focuses on the recent competition between Boeing and a team composed of Northrop Grumman and European Aerospace and Defense Systems (EADS) (hereafter called Northrop/EADS) over what may be one of the largest defense contracts in U.S. history to supply the United States Air Force (USAF) with a new fleet of aerial refueling tankers.

This article:

* discusses the importance of imports and national defense spending in the U.S. economy,

* explores the dependence (or lack thereof) of the United States on foreign imports in the defense sector,

* provides a historical taxonomy of strategies that have previously been deployed to reduce the role of foreign manufacturers in the U.S. defense industrial base, and

* examines in detail the recent competition between Boeing and Northrop/EADS.

The article argues that this competition required the deployment of innovative strategies on the part of the incumbent in the industry (Boeing) and the potential entrant (Northrop/EADS). In this instance, the foreign entrant, EADS, teamed with a U.S. manufacturer and has proposed to directly invest in the U.S. defense sector by creating jobs and building facilities. In many of the historical cases, on the other hand, foreign involvement in the defense sector involved entering U.S. markets either by acquiring a U.S. company or by producing the products overseas and importing them into the United States.

1. International Trade in the Military Aerospace Sector

To put the decision on the procurement of the aerial refueling tanker in an economic context, it is useful to consider the U.S. trade balance and the importance of the military aerospace sector within it. The increasing dependence of the U.S. on foreign imports has been a major impetus behind concerns over the shrinkage of the U.S. industrial base, particularly in key sectors. A May 2000 USA Today survey found that Americans favored trade by a margin of 56 to 36 percent, but a June 2005 survey found that the percentages had narrowed to 48 percent in favor and 44 percent against (Lynch, 2006).

Proponents of protectionism have become particularly concerned about the dependence of the United States on imports when the industries involved are important to national defense, such as aerospace. National defense outlays are an important part of the U.S. economy and whether those outlays support U.S. or foreign firms is a key issue for members of the House and the Senate. As Figure 1 shows, the national defense sector is a smaller percentage of gross domestic product and a smaller percentage of total government outlays today than in 1960--despite the increased U.S. operations in Iraq and Afghanistan--since other segments of the economy have grown rapidly, new government programs have been developed, and the Cold War has ended. Figure 2 suggests that the economy (as measured by GDP) has grown faster than national defense in nine of the past 12 years, and GDP has grown faster than total U. …

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