Trade and National Defense

by Don Boudreaux on March 25, 2008

in Trade

Retired Rear Admiral (USN) Paul Rohrer has a letter in today’s Wall Street Journal.  I sent this letter in reply:

Admiral Paul Rohrer argues that U.S. national defense is compromised by the Air Force’s award of a tanker contract to EADS, an aerospace company in Europe (Letters, March 25).  The bulk of Adm. Rohrer’s case, however, is mere standard-issue protectionism.  And the facts of which he complains strengthen, not weaken, U.S. national defense.

For example, Adm. Rohrer gripes that “EADS has received tens of billions of dollars in illegal subsidies from the French and other European governments.” Translation: European taxpayers now foot part of the bill for Uncle Sam’s weaponry, giving Americans more resources to spend (if they wish) on national defense and European governments fewer such resources. Likewise for the Admiral’s complaint that “European defense acquisition policies are already highly protectionist.”  Translation: European governments pay unnecessarily high prices for their weapons, giving those governments less bang for the buck (or, explosion for the euro).

The end result is that America’s defense capacity is strengthened both
absolutely and relative to Europe’s.

Sincerely,
Donald J. Boudreaux

It’s always possible, of course, to argue that the duty of each government to provide reliable national defense requires that no foreign suppliers be relied upon for any military supplies — or, indeed, for supplies of any sort (such as food, clothing, electronics, and pharmaceuticals) that might be used by the military.  Reliance upon foreign suppliers means that if “we” go to war, “our” military might no longer have access to some materials and outputs necessary for fighting a war.  “We” would then be at the mercy of foreign governments whose troops and tanks and terrorists stand ready to humiliate and conquer “us.”

Apart from emphasizing the fact that as a country grows more prosperous, the government of that country enjoys greater capacity to arm its military with the latest weaponry, I’ll say no more here about the alleged national-defense exception to the case for free trade.  But I will recommend that you read the relevant sections (on national defense) in this brilliant 1954 monograph by Leland Yeager.  (See especially, on national defense, Chapter 4.)  Here is one paragraph from Yeager’s monograph:

The assumption is false that a government can know in advance just
which weapons and industries will be most important in some possible
future war. Constant technological change is a leading feature both of
modern war and modern industry. Furthermore, modern industry has proved
itself remarkably able to convert and reconvert between peacetime and
wartime production. Incidentally, among the industries that, so far,
have been most easily convertible are those in which the United States
has a Comparative Advantage, such as automobiles, electronics,
elaborate office equipment, and industrial machinery. These strategic
industries typically do not need tariff Protection, and Free Trade
would enlarge their peacetime markets. (By contrast, the industries
that typically clamor for continued or increased Protection—handbags,
pottery, fish, nuts, cheese, hats, wine, toys, and so on—can turn much
less readily to war production.) The moral is that the United States
should not partially freeze its industry by Protectionist policies into
a pattern that might well prove, if war finally came, to be out of
date—and all at the cost of a sure loss in real national income. Even
from considerations of national defense, it would probably be wiser to
adopt Free Trade and other policies contributing to general economic
strength and to rely, if war cut off foreign supplies, on the
conversion of peacetime industry to wartime purposes that would in any
case be necessary.

Finally — and please forgive my unforgivable vanity — I discuss the national-defense issue in Chapter Five of my book Globalization.

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{ 31 comments }

Brent March 25, 2008 at 3:14 pm

Professor:

Although I have four children, use an Apple computer, and have read up on Hayek–much like your colleague–I have to differ. Strategic technology for our military ought, whenever possible, be homegrown.

You know, so we stay safe.

But, doggone, I need to read your new book. It is expensive, though.

FreedomLover March 25, 2008 at 5:51 pm

Brent – if we're already outsourcing so many components on "strategic assets", then I don't see what the problem is with the refueling tanker. Strikes me of jingoism.

hutch March 25, 2008 at 6:11 pm

The same argument is/was made to support farm subsidies: our national security depends on our ability to feed ourselves. I don't buy it. Like so many things, the US will never be defense, food, energy, etc independent. Nor should we ever make that the goal.

FreedomLover March 25, 2008 at 7:27 pm

BTW – if you can point me to any time in its history when the 13 colonies, and then USA was 100% independent in all natural resources and manufactured goods, you'll get a super shiny gold star.

Dr. T March 25, 2008 at 8:25 pm

Calling Admiral Rohrer a protectionist is inappropriate without more evidence. Many of his arguments were sound. Like him, I am extremely suspicious of last-minute changes that favored EADS in the bidding process.

I would never give a military contract to a company with no experience. Tanker jets are substantially different than passenger jets or bombers. Since EADS has no tanker building experience, they never should have been allowed to bid.

Russ Wood March 25, 2008 at 9:05 pm

I can think of no more political, corruptible, inefficient process than the one by which we select military contracts.
It would not surprise me if a serious flaw was made by selecting EADS over our North American providers.
But that does not dispute Don's point. It is quite possible and plausible that a foreign provider is our best option. Protectionism should not be part of our decision process.

Brad Hutchings March 25, 2008 at 10:54 pm

The way I see it, if you have a problem with EADS getting this contract, then you should move to the country that gave Boeing he contract. Oh, there is no such country, you say? Well, maybe there is a reason for that.

Signed,

muirgeo

Bruce Hall March 25, 2008 at 11:46 pm

I'm looking for some foreign suppliers of furniture, clothing, cars, jewelry, and a multitude of other desirables, that are willing to take my IOUs that may or may not be redeemable, but will allow them to subsidize my lifestyle without any real cost to me.

I figure if the government can do it, why can't we just bypass the middleman. I don't even care if the products are counterfeits as long as they are really good counterfeits. Surely, these suppliers know a good deal when they see one. I'll give them preferential treatment for any future products they might want to supply, thereby guaranteeing them a continuing market for their production facilities.

We all win. What could go wrong?

Jeff Holmes March 26, 2008 at 6:11 am
vidyohs March 26, 2008 at 7:11 am

Don,

From the viewpoint of an economist I can see and understand why you think the way you do. I would not challenge you on that.

From the viewpoint of a layman military man I have to hesitate and disagree. Here's why.

Sept 1980, Iraq invaded Iran igniting the Persian Gulf War that lasted until 1988.

Iran, due to its long cozy relationship with the USA (ended with the overthrow of the Shah) had only combat aircraft from the USA at the time of the Shah's overthrow and had not had time or incentive to replace or update that aircraft. Furthermore, virtually all of the combat machinery of the Iranian forces were of USA manufacture. At the time of the Iraq invasion Iran was caught between a rock and a hard place.

Iraq had as its combat machinery mostly Soviet manufacture and some French. The Iraqis were flying MIGS and Mirages, and using Soviet tanks.

The F4s, F5s, and F15s the Iranians were flying were combat superior to the Iraqi aircraft yet Iran lost air superiority in about six months and never regained it. As a matter of fact after that initial period Iran was hardly able to put an airplane in the sky.

Why? The planes came from the USA and most importantly so did the replacement parts, and we were no longer friends or suppliers of the Iranians.

In approximately a year Iran was virtually incapable of putting any kind of land combat vehicle into action for the same reason. Spare parts for repairs.

Iraq, on the other hand, had no supply problems. France and the USSR happily provided replacement parts.

This war taught two lessons to me. 1. That if you're going to put your defense in the hands of foreigners make sure that they stay your friends. 2. Even with air and ground combat vehicle superiority Iraq's military was incapable of defeating the Iranians. In spite of its huge size the Iraq military was a bean bag in actual combat.

Summary: France has been resentful and hostile to the USA going back to WWI, and especially so since WWII. No French government since WWII has thawed those icy relationships.

From a strategic standpoint, I have to suggest it would be wisest to keep production of defense equipment and of replacement parts under our control from start to finish. I fully believe that France would withhold spare parts in crucial times if it deemed doing so was in ITS best interests, and their interpretation of what is in their best interests I point out again do not necessarily dovetail with the USA's interpretation.

vidyohs March 26, 2008 at 7:14 am

For those who don't understand how it works, yes the Iranians cannabelized their downed machinery for spare parts to keep something going, but that can only last so long before there is nothing left to cannabelize. That point comes quick in a war.

tw March 26, 2008 at 8:54 am

Don,

A related question based on a story that came out today: What is your opinion of the federal government outsourcing U.S. passport work?

piperTom March 26, 2008 at 9:25 am

You and the admiral should remember secondary effects. If the suppliers and employees of our military industry are using imported goods or services, then they will be crippled when war cuts off trade. We can't allow THAT.

Then there's the tertiary effects…

Tom March 26, 2008 at 10:14 am

"Translation: European taxpayers now foot part of the bill for Uncle Sam's weaponry, giving Americans more resources to spend (if they wish) on national defense and European governments fewer such resources."

I don't think they get fewer – given that much of their defense comes from us. It's just routed differently. Think of it as them freeloading less.

Saum March 26, 2008 at 11:23 am

It amuses me that so many paragons of free markets and competition are ready to claim an exception for this or that industry from the virtues they claim to espouse.

Hammer March 26, 2008 at 11:36 am

While I don't disagree with vidyohs exactly, I would point out that part of Iran's problem was that they were using technology they could not hope to replicate. The US on the other hand could start producing the spare parts for various machines without too much difficulty should the need arise.
The issue then becomes one of "in a pinch, can we duplicate what we use?" Since using sub-standard gear is not really an option (though using cutting edge, meticulously crafted tech is not necessary, see AK-47 vs. M16), a nation is left with two options: use only what you can make at home, or buy elsewhere and hope for the best. Hoping for the best is generally a really poor choice in war, which usually constitutes "the worst" anyway.
So we have "Use only what you can make at home." However, that does not mean you MUST make it at home. Rather, it merely means you are capable of it. In other words, if you have the capacity to produce say an F-14 by virtue of high technology and industrial know how, you don't have to make it in general. So long as you can when it is important.

So as it turns out, technological skill advanced by the free market is in fact the greatest source of strength for the USA, as least as I see it.

vidyohs March 26, 2008 at 6:03 pm

Hammer,

I think you presented a good case. Yes, we do have the tech to gear up and produce any and every part needed.

I am not a mechanical engineer nor a manufacturing expert, so my question would be just how long would it take to produce the machine tools that would be used to make the parts? And, could that lag time be crucial in a situation turned unfavorable due to an excessive rate of wear or damage from an unanticapted level of enemy skill?

I agree with you that the AK47 is slightly lower tech than the M16 and so suffers adverse conditions better. Not to sure that the same comparisions will hold over when we step up to sophisticated aircraft, tankers or combat.

And, last of all I repeat my main point. If you're going to depend on a foreigner to produce your combat equipment, you'd better choose that foreigner carefully and make sure you remain close friends. I just don't think France meets those standards.

vidyohs March 26, 2008 at 6:46 pm

"It amuses me that so many paragons of free markets and competition are ready to claim an exception for this or that industry from the virtues they claim to espouse.
Posted by: Saum | Mar 26, 2008 11:23:25 AM"

I think you're confused, Saum, not because it is necessary but because you want to be.

shawn March 26, 2008 at 7:22 pm

…*i* don't want to be confused…but I do see some protectionism creeping in there, vidyohs; don't you think that many would find their industry 'special' enough to warrant protection/anti-free trade? now, i happen to think your points have merit; but I also know that I don't know enough about free trade's benefits to argue anyone with specific knowledge about an industry that I'm not familiar with.

shawn March 26, 2008 at 7:24 pm

sorry; point being of that last sentence: and so I'm afraid that many people could be able to present a somewhat valid case for 'home grown' this or that, especially in case of war.

vidyohs March 26, 2008 at 7:59 pm

Hi shawn,

I may not be up to the task of making my point the way I think it, but I will try.

In my mind there is free market and there is defense, and I don't think the two should be confused.

Our defense resides in our military not our State Dept, and our military has two prime purposes, to kill and destroy. Those are not market functions. The free market can support the defense, sure, but like any freedom, freedom lies in what one agrees to do to restrict himself for the greater good of cooperation, not in what one believes is his right regardless of how it affects others.

Without adequate defense (existence of and rule of, law) there is certainly no certainty or hope of a free market.

How we provide for that military is, or can be, a market function. The USA has adequate markets internally from which to solict market bids on defense needs without exposing our defense to the uncertainties of fluid relationships with other nations for supply of crucial equipment.

The historical record regarding nations at war shows that those nations that were the least self contained in necessary production were hamstrung in their war efforts. Had Germany access to the same adequate resources the USA had during WWII it is doubtful they could have been defeated. My account of Iran during the Persian Gulf War of 1980 is another example.

People(nations) can be fickle. War situtations can be even more fluid and events even more fickle than peoples loyalties. I would hate to be forced to war with my supply lines in the hands of anyone but my brothers.

Another facet to this is the understanding that of all nations, France is probably one of the worst to deal with and I could see them in time of war using replacement parts supply as a bargaining chip in gaining position in a relationship. Regardless of any prior deals made in the intial contract, I would not put it past them.

It doesn't matter to me which company "in house" gets the (free market) open bid to do the work, when it comes to defense supply of combat equipment particularly, I think it should be kept "in house". In our best interests we should view our defense very selfishly as a nation.

Now does all of this mean that I do not recognize the corruption in so-called open bid process, etc etc., of course not. I know that very well. But that is an issue that should be addressed to ensure an "in house" free market open bid process, not kill it.

Well, that's about as good as I can get it down.

vidyohs March 27, 2008 at 6:07 am

Shawn,

My above reply was excessively wordy and having thought about it I think I can sum it up by saying that my view about keeping defense equipment production in the USA is that I would not do it to protect the domestic industry; but would do it to protect our ability to defend ourself to the best of our ability.

The world is unpredictable enough as it is, but becomes exceedingly more so in a time of war.

vidyohs March 27, 2008 at 7:11 am

Shawn,

I thought I saw the horse twitch, so I am going to give 'em one more whack and draw an analogy that might better explain the position in which I think the USAF has put its ability to operate.

Suppose I, as a white, had the idiocy to move into a home in Houston's 3rd ward where they think Rev Wright is right on target.

The first thing I would do is buy a pump shotgun and a 45 handgun for home defense, and plenty of ammo for both.

What I would NOT do is put two shells in the shotgun, two bullets in the 45, and then take the spare ammo across the street to that young black muslim couple and ask them to hold my spare ammo for me and bring me spares when I need them.

The first reason I would not do that is that when I need the spares I am really going to have a dire and urgent need; and the second reason is that I would be putting my spares in the hands of people who give no visible evidence of respecting or liking me.

Under that analogy comparing my desire to keep my spare ammo in my own home to the "protectionism" of free markets, by keeping defense production under our control and in our lands, becomes clearly ridiculous. Yet, that is what it comes down to in this discussion.

BTW none of my position should be taken to indicate that I think the French are under any obligation to anyone other than the French. That statement just highlights the problem I see.

Bruce Hall March 27, 2008 at 11:05 am

Long ago and far away, I was a SAC officer in an ICBM wing.

Nothing said "Made In France" or "Made In China". But then, ICBMs were not a competitive item or we might have considered buying the larger-payload Soviet-made missiles… even if they were "lower technology" like the AK-47.

Nevertheless, the decision to keep the designing and manufacturing of critical military items within the U.S. seemed to make sense to the non-economists who worked in the Pentagon. They might have been concerned that some of the Soviet-made missiles might not work as well as we wanted when we wanted to use them against the Soviets.

Sure, the situation is different now. The Europeans are our allies and a tanker is just another airplane with a big rubber bladder. The real selling point is that France is eager to buy vast amounts of California wines in exchange for the contract to build the tanker.

Fair trade; free trade; we all win.

Billy March 27, 2008 at 11:33 am

Vidyohs,

Keep in mind that a significant portion of the actual work (not sure what parts or percentage, specifically, but about 25,000 jobs worth) is going to be done stateside. If the French government were to cut us off from replacement parts, I doubt we'd hesitate to get whatever necessary tools we could from the Mobile, AL, and other stateside facilities. Of course, if the brass is as worried about that scenario as you are, I suspect they'd ensure that we could service the planes ourselves while the relationship was still good. The lag time should therefore be minimal. Consider also that "100% homegrown" was not an option on this particular menu. Boeing's proposal used Italian and Japanese parts, which may well be subject to the very same concerns you've voiced here.

Generally, I'd say your concerns are certainly something that should be given attention when a contract is being awarded, but I'd be surprised if the actual danger of it to the American military were ever enough to tip the scales the other way.

vidyohs March 27, 2008 at 9:30 pm

You guys are making it hard on me, I tell ya!

I am just sorry that my skills are inadequate to express what I want to get across.

Bruce, as an officer in the military you know as well as I do that there were/are brilliant people in the military that are/were totally hamstrung by politics. You have to have seen some of the total stupidity that politics brought to military decisions.

I am sorry sir, France does not fit my description of an allie. I should not have to say more than Vichy France after having their asses kicked by the Germans, and then the exit from NATO and ejection of all foreign troops from French soil. France is an independent nation and can do what France wishes, but they are one of the last nations I would put stock in because of their resentment that no one kisses their ass anymore on food, wine, weapons, women, cars, and sexy entertainment. Hell they even hate Mickey Mouse. LOL

If the Arabs told the French that they were going to cut off all of its oil supplies because of their "friendship" with the USA, hell the French would nuke the Whitehouse before they would Riyahd. LOL!

All I can say is that I hope they stock pile a lot of patches for those rubber bladdrs.

vidyohs March 27, 2008 at 10:12 pm

Billy,

Like I said you guys are making it rough. I do not have to win this debate and that is not my attitude.

I just do not see it as a free trade issue.

"The lag time should therefore be minimal. Consider also that "100% homegrown" was not an option on this particular menu. Boeing's proposal used Italian and Japanese parts, which may well be subject to the very same concerns you've voiced here.

Generally, I'd say your concerns are certainly something that should be given attention when a contract is being awarded, but I'd be surprised if the actual danger of it to the American military were ever enough to tip the scales the other way.
Posted by: Billy | Mar 27, 2008 11:33:28 AM"

What is minimal? And, how much ground can be gained by an enemy while your military hardware is sidelined for a "minimal" time?

In both gulf wars in Iraq our troops rolled up the Iraqi military in a matter of days, especially so in the first war. How many hours or days to get the part and install it and return the piece to combat?

Not an easy answer in the best of conditions (parts stored in warehouse near repair facilities). What's the answer if the part has to be provided through a "system". Can't happen you say? I'm telling you from experience that politics in the military and between the military and congress says it can.

Telling me that other bids included outsourcing of parts to other nations simply does not make me feel better about the situation. It only adds to my unease with the stupid political correctness that has seeped into every single nook and cranny of our nation.

I have written before about my shipmates and friends sitting in a North Korean prison camp for a year because people just could not believe that it could happen.

It can happen, and Murphy's law says it will happen.

Sometimes to understand pain and danger we just have to shoot ourselves in the foot. No other lesson will suffice.

Last, about politics and alliances. Don't forget that Hitler and Stalin signed a pact of mutual regard, peace, and support which was broken by Hitler the moment he thought is was time.

As for France, don't forget that France was selling their highest tech Mirage fighters to China, Yugoslavia, Greece, Egypt, Syria, Iraq, and others during the cold war when Syria and Iraq were in the Soviet camp.

When do you think of leg protection, on entering the desert or when you see the blur of the Rattler out of the corner of your eye?

Again I do not see this issue as one of free markets vs protectionism. My analogy upthread makes that clear.

I would hope I am wrong wrong wrong, but I'd rather be sure.

Billy March 28, 2008 at 10:19 am

If I knew what minimal was, I'd have been more specific ;-) . In this case, I think we can make the lag time due specifically to your concerns zero, but that involves a bit of speculation on my part. Namely, I speculate that those people whose job it is to ensure our military readiness recognize the same concerns and the fairly obvious steps that can be taken now to avoid possible calamity later. Those steps include establishing our capability to replicate what might be cut off, stockpiling those parts before the danger of being cut off materializes, making sure we have enough counterleverage to make such cutting off as unlikely as possible, and keeping maintenance up to speed to ensure that fleet reduction due to a need for parts is minimized, just to name a few. The delay in getting a piece returned to the field may still be too long for a given catastrophe, but it would be the same delay as in a "100% homegrown" system. The marginal delay due to the foreign source is the only thing I'm speaking of in this thread.

I'm not saying anything can't happen, just that this particular danger in this particular case can be planned for and very much mitigated. Failure to do that planning would make it very real, indeed, but that failure's in our hands, not France's. In other words, we obviously have to think about leg protection before we enter the desert, but we haven't entered the desert just by awarding this contract.

vidyohs March 28, 2008 at 12:27 pm

Ok Billy,

We are at an impasse.

My wariness comes from having been burned by ambiguous words and arbitrary power too many times.

It isn't just "minimal" I have a problem with, it is any word that is ambiguous, such as adequate, ASAP, etc.

It took me nearly 10 years in service before I really understood that if there was a way for something to be misunderstood then it was guaranteed that the majority would do so.

My career covered many facets of military duties. I did everything from active gathering, to processing, to statistics, to publishing a trade journal for a subspecialty in my line of work, to writing new Standard Operating Procedures on professional topics, general military performance, and was sent to school to learn how to Career counsel and Fleet Train, which means I also learned how to put together and teach lesson plans, another duty of mine on two occassions.

I can only tell you, Billy, that using a word such as minimal or adequate, and not defining it in concrete numbers or steps, will always be a huge mistake in making agreements or contracts.

Instead of writing, "this will be done in a minimum amount of time", I learned to write, "this will be done in 5 minutes." That way no one was confused and no one had an excuse.

In essence I wrote to take away the forseeable excuses of the ignorant and the lazy in order to get a mission done with accountability and responsibility clearly delineated.

My position here is that I bet I could go through the contracts on Tanker and just like a lawyers, find loopholes that France could drive a truck through, plus not forgetting that France is a sovereign nation; if it chose to renege on the contract in the middle of a war, what are we going to do to punish them….open another front and invade?

Adequate, is a deadly word if it is not defined. There is no way in hell I would want to go into a jungle where I knew I was going to certainly engage the enemy in a broad sector battle and be told by the bean counting supply corps, "yes we will be there with adequate ammunition to support you." I learned early that their interpretation of adequate was based on entirely different parameters than my interpretation. What I would want to hear is, "Yes we will be one minute behind you with everything we have."

I would not want to be hunkered down in a shallow depression with dead bodies all around me, and an unknown number of enemy doing their best to add me to the pile, and have someone tell me by radio, "The choopers are down but we can repair and have one there in a minimal time."

Ok, what do I plan for? What do I hope for?

In addition, if you think the supply corps are not subject to political pressures from within their own military structure, you haven't really been exposed to it.

I believe that by making the provision of our defense forces open to fell good political correctness we are entering the desert without thinking of leg protection.

I have been wrong before, I hope I am this time. I just don't see it as an issue of Free markets Vs Protectionism.

Anyway, I appreciate your responses and your viewpoint.

vidyohs March 28, 2008 at 12:28 pm

Penultimate paragraph, that should be "feel good" not fell good.

Billy March 28, 2008 at 5:09 pm

Bear in mind that the ambiguous language is coming from me, an observer, rather than those making the contracts. I'm not arranging your air support. I'm not negotiating or drafting the contract. I'm just thinking in print about a somewhat vague supply chain hypothetical with plenty of undefined parameters. My answers, such as they are, can't be any more precise than the question they're addressing.

Accepting the impasse, I would like to clarify a couple of things.

First, France owns about 15% of EADS. Combine that fact with the various avenues of leverage the U.S. may have independent of this contract, and the French government's ability to unilaterally rescind or renege is somewhat less than unconstrained.

Second, I'd be shocked to find out any facet of the military is free of political pressure. The mere fact of it doesn't say much, though, since that pressure can flow any different direction. I know that given EADS' participation and the 2004 shenanigans regarding the same fleet replacement the USAF took special care that all its bases were covered, in light of anticipated political blowback. This leads me to believe that the most stringent pressure coming down the line on this issue would be in the direction of making sure we could replace needed parts on our own.

Third, I'm not sure I understand your use of feel good political correctness here. Awarding the contract to a firm so tightly associated with Europe in general and specifically France was bound to be politically unpopular. So either the USAF decided to accept the superior proposal, despite its political incorrectness, or they decided to accept an inferior and politically unpopular proposal. I can't see sufficient incentive to do the latter, so I suspect the former is the case. The politically correct thing to do would have been accepting the American firm's proposal, inferior or not, and trumpet the American jobs created.

As always, I appreciate the exchange.

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