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<TITLE>Paul J. Hoeper</TITLE>
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<CENTER><FONT FACE="Palatino"><FONT COLOR="#000000"><FONT SIZE="+3">U.S.
Perspectives on Transatlantic</FONT></FONT></FONT></CENTER>
<CENTER><FONT FACE="Palatino"><FONT COLOR="#000000"><FONT SIZE="+3">Armaments
Cooperation</FONT></FONT></FONT></CENTER>
<CENTER><FONT FACE="Palatino"><FONT COLOR="#000000"><FONT SIZE="+2">United
States Deputy Under Secretary of Defense Paul J. Hoeper</FONT></FONT></FONT></CENTER>
<CENTER>
<H4><B><FONT FACE="Palatino"><FONT COLOR="#000000">THE NEW GLOBAL
DEFENSE NEEDS</FONT></FONT></B></H4> </CENTER>
<P><FONT FACE="Palatino"><FONT COLOR="#000000">The world order of the
past half-century, which we called the Cold War, led both sides to develop
superb defense industries--industries with remarkable capabilities and
vast capacities. To the relief of all, that balance of terror has ended.
But the capacity of global defense industries is now out of balance with
the budgets for perceived defense needs.</FONT></FONT> </P>
<P><FONT FACE="Palatino"><FONT COLOR="#000000">Two economic consequences
occur when capacity exceeds demand: lower prices and lower profits. If
excess capacity continues, companies generally take one of two courses:
they lay off workers in an attempt to restore profits by lowering costs;
or they lower prices in an attempt to stimulate demand from countries that
were not previously customers. Companies that take the second route hope
to expand their market share enough to restore profit levels. The present
excess capacity in the global defense-industrial base is putting
governments squarely between the domestic political evil of unemployment
and the foreign policy evil of proliferation.</FONT></FONT> </P>
<CENTER>
<H4><B><FONT FACE="Palatino"><FONT COLOR="#000000">RESTRUCTURING IN THE
U.S. DEFENSE INDUSTRY</FONT></FONT></B></H4></CENTER>
<P><FONT FACE="Palatino"><FONT COLOR="#000000">Four years ago, the U.S.
Department of Defense recognized that the U.S. domestic armaments capacity
exceeded its demand. Then-Deputy Secretary of Defense Bill Perry got in
touch with a dozen defense industry chief executive officers and invited
them to dinner at the Pentagon. Dr. Perry told these executives that there
were twice as many of them in the room as he expected to see in five
years, and that the U.S. government was prepared to stand by and watch
defense companies go out of business. This dinner is known around the
Pentagon as the "Last Supper."</FONT></FONT> </P>
<P><FONT FACE="Palatino"><FONT COLOR="#000000">If the mergers being
considered between Boeing and McDonnell Douglas and Hughes and Raytheon go
through, 15 of America's top defense companies will have become four:
Lockheed Martin, Boeing, Raytheon, and Northrop Grumman. These companies
have not simply merged, they have restructured by closing excess
facilities and by cutting their work forces.</FONT></FONT> </P>
<P><FONT FACE="Palatino"><FONT COLOR="#000000">The 20 or so mergers in
the U.S. aerospace and electronics sector during the 1990s have cut 1.8
million jobs from the defense sector. Fortunately, our economy has been
robust enough to absorb this job loss. In fact, the United States has
created more jobs than it lost during the present decade and our
unemployment stands near a post-World War II low.</FONT></FONT> </P>
<P><FONT FACE="Palatino"><FONT COLOR="#000000">But I do not want to
minimize the pain that some workers have felt. The average skilled
assembly worker who is laid off often needs a year to find a new job that
pays an average of $19,000 per year less than he or she received before.
Our government--and our aerospace companies--care about these workers.</FONT></FONT>
</P>
<P><FONT FACE="Palatino"><FONT COLOR="#000000">But America's defense
industry has had to restructure out of necessity. Our defense budget has
fallen dramatically since 1985--both in real terms and as a percentage of
GDP. As a percentage of GDP, it is now about 3%. This is the lowest
percentage in half a century. And while present world conditions prevail,
the defense budget is not likely to grow; at best, it may continue at
about 3% of GDP. Because the security interests of the United States
cannot be properly maintained if the American people have to pay the costs
of excess capacity, we have had to stand by and watch companies leave the
defense sector. We simply cannot stay strong militarily and economically
by paying more for less.</FONT></FONT> </P>
<CENTER>
<H4><B><FONT FACE="Palatino"><FONT COLOR="#000000">RESTRUCTURING IN THE
EUROPEAN DEFENSE INDUSTRY</FONT></FONT></B></H4></CENTER>
<P><FONT FACE="Palatino"><FONT COLOR="#000000">Excess capacity in the
global arms industry, declining defense budgets, and the rapid
restructuring of the U.S. industry have caused Europe, through initiatives
proposed by France, to look at ways it too can deal with the changes that
have taken place in the defense sector during the last decade. Along with
downsizing and privatization initiatives, Europeans have formed
organizations to manage cooperative ventures among different countries.
The ultimate goal of combining their resources is to become more
competitive and focus resources more sharply.</FONT></FONT> </P>
<CENTER>
<H4><B><FONT FACE="Palatino"><FONT COLOR="#000000">The Development of
Organizations to Manage Cooperative Ventures</FONT></FONT></B></H4></CENTER>
<P><FONT FACE="Palatino"><FONT COLOR="#000000">National Armaments
Directors, meeting as the Western European Armaments Group, formed a
management organization, the Western European Armaments Agency (WEAO), as
a subordinate body of WEU. Its goal is to eventually create a European
armaments agency. WEAO will start by coordinating member participation in
some 40 ongoing armaments research and development projects and by
assuming responsibility for new cooperative projects.</FONT></FONT> </P>
<P><FONT FACE="Palatino"><FONT COLOR="#000000">France, Germany, Italy,
and the UK have created another organization, the Organization for Joint
Cooperation in Armaments (JACO, also known by the French acronym OCCAR).
This agency is a follow-on to the French-German Armaments Agency proposed
two years ago. JACO's purpose is to increase efficiency and reduce the
costs of developing and producing weapons systems for its members; it
eventually plans to manage cooperative weapons programs for national
procurement agencies. JACO programs will be run by integrated teams and a
single director who will be given the requisite authority to impose
decisions on national partners.</FONT></FONT> </P>
<P><FONT FACE="Palatino"><FONT COLOR="#000000">WEAO and JACO are two
examples of the integration process Europe is following in order to more
closely coordinate national armaments programs that in turn will allow its
armaments industry to remain competitive in the world market. If the
Europeans can work out their differences, the long-term result should help
lead to a healthy defense industry that is a much more viable competitor
and partner for U.S. industries in the worldwide armaments market. To the
same end, efforts are continuing to consolidate and rationalize the
European defense industries--efforts that must take place both within and
across national boundaries.</FONT></FONT> </P>
<CENTER>
<H4><B><FONT FACE="Palatino"><FONT COLOR="#000000">The Need to Go beyond
European-wide Cooperation</FONT></FONT></B></H4></CENTER>
<P><FONT FACE="Palatino"><FONT COLOR="#000000">I have two cautions
regarding this work. First, it is not enough to privatize companies nor to
merge them; neither privatizing nor merging automatically eliminates
excess capacity. Painful choices about closing excess facilities and
rationalizing labor forces must be made. Second, if the formation of WEAO
and JACO is accompanied by the imposition of national preference rules,
then we are headed in an extremely unproductive direction.</FONT></FONT>
</P>
<P><FONT FACE="Palatino"><FONT COLOR="#000000">There is also a need to
advance industrial cooperation with the nations of the former Warsaw Pact,
a step that is now becoming a reality. The Western defense industry has
started to invest capital and technology in the Central and Eastern
European production capacity because it sees the potential residing in the
region's talented and educated work forces.</FONT></FONT> </P>
<CENTER><B><FONT FACE="Palatino"><FONT COLOR="#000000"> </FONT></FONT></B></CENTER>
<CENTER><B><FONT FACE="Palatino"><FONT COLOR="#000000">DEVELOPING
INDUSTRIAL PARTNERSHIPS WITH NATO MEMBERS</FONT></FONT></B></CENTER>
<CENTER><B><FONT FACE="Palatino"><FONT COLOR="#000000">AND FORMER WARSAW
PACT COUNTRIES</FONT></FONT></B></CENTER>
<P><FONT FACE="Palatino"><FONT COLOR="#000000">On the government side,
the strengthening of our political relationships with the former Warsaw
Pact nations over the past seven years has resulted in new opportunities
for all concerned. Industrial partnerships are now forming. We are working
hard to improve not only military but also industrial interoperability. In
the U.S. we are moving to adopt the use of international commercial
standards for our own defense procurements, part of a trend away from
unique military standards that will help industries adapt to producing
NATO-compatible equipment. We are releasing hundreds of standards that
provide the information necessary for manufacturing NATO-standard
equipment. We have also invited NATO partners to join the CALS effort so
that they can move toward a common and single-use defense armaments data
system. And we have opened to full participation by NATO Partner nations
several NATO committees that deal with the infrastructure supporting
defense acquisition, codification, quality assurance, contracting, and
material standards.</FONT></FONT> </P>
<P><FONT FACE="Palatino"><FONT COLOR="#000000">As part of this effort,
however, the governments of Central Europe must do their share. First and
foremost, they must create business climates that promote private
investment. Here in the Czech Republic, the government is doing exactly
that, as evidenced by the willingness of the Western defense industry to
invest in the Czech Republic's only airframe manufacturer, Aero Vodochody.</FONT></FONT>
</P>
<P><FONT FACE="Palatino"><FONT COLOR="#000000">In addition, Central
European nations must put in place a defense procurement system that is
open and transparent: a system in which competitors can feel comfortable
that if they submit the most cost-effective proposal, they will win any
competition. A procurement system that does not measure up to this
standard, that does not give companies the confidence that their proposals
will be considered on their merits, will not attract first-rate
competition.</FONT></FONT> </P>
<CENTER>
<H4><B><FONT FACE="Palatino"><FONT COLOR="#000000">AVOIDING A "PRISONER'S
DILEMMA" SITUATION</FONT></FONT></B></H4></CENTER>
<P><FONT FACE="Palatino"><FONT COLOR="#000000">If we fail to reduce the
world's excess capacity for defense articles, or if we wind up with a U.S.
market that is closed to European defense articles and a European market
that is closed to U.S. defense articles, we could find ourselves in an
economic "prisoner's dilemma"--where rational individuals defect
to a position that is irrational for the community as a whole--which could
encourage weapons proliferation. For example, a company official might
say, "I would never sell this weapons technology to Country X. Except
that I know Y will. So, since Country X is going to get the capability
anyway, I may as well get the sale ..." All competitors might think
this way, and Country X would wind up with the capability in question,
even though it might be harmful to the security posture in the region. In
fact, the sale might even be made at an unprofitable price for the selling
industry. While I am not suggesting that all companies and governments
would succumb to the "prisoner's dilemma," powerful economic
forces would lead them in this direction.</FONT></FONT> </P>
<P><FONT FACE="Palatino"><FONT COLOR="#000000">What can be done to avoid
this situation? The only reliable solution is cooperation in the defense
armaments field. So how must we proceed? First, as our panel of defense
ministers has suggested, nations should begin the armaments cooperation
process early--initiating discussions on common military needs before
formal requirements are locked in. Plans for armaments cooperation should
begin before any country has identified a specific company to perform the
work.</FONT></FONT> </P>
<P><FONT FACE="Palatino"><FONT COLOR="#000000">Second, we should plan to
buy systems in a competitive environment. We should buy from competing
teams that include industrial participants from each partner country, and
not force one nation's industry to compete against another's. In this way
we can realize the benefits of competition without creating the political
unease that results from competitions in which some participants might not
receive an equitable work share. We can encourage competition between
companies instead of between parliaments.</FONT></FONT> </P>
<P><FONT FACE="Palatino"><FONT COLOR="#000000">The U.S. and our European
partners are using this model of competition in the Medium Extended Air
Defense System (MEADS). We hope to do the same in the production phase of
the Multifunctional Information Distribution System (MIDS) program. We
would also like to use competing teams throughout the production phase of
any cooperative program, using a 'leader-follower" scheme. By
creating a true partnership among the nations acquiring a system, we would
be able to produce and obtain interoperable equipment that incorporates
the cooperating nations' best technologies and capabilities in a way that
maximizes economic value and minimizes the threat of proliferation.</FONT></FONT>
</P>
<CENTER>
<H4><B><FONT FACE="Palatino"><FONT COLOR="#000000">THE NEED FOR
TRANSATLANTIC COOPERATION</FONT></FONT></B></H4></CENTER>
<P><FONT FACE="Palatino"><FONT COLOR="#000000">The end of the Cold War
should not--and need not--signal the beginning of a trade war in defense
armaments. With cooperation we should be able to secure the benefits of
military interoperability as well as the benefits of the world's best
technologies. But these benefits can be achieved only if cooperation is
transatlantic. We in the United States believe that this cooperative
approach is the optimum way for all NATO members to meet the needs of our
forces in the 21st century. We have already set our course this way, and,
judging by the favorable reaction in a recent edition of <I>The Economist</I>,
we are headed in the right direction. With your help we will continue down
this road to a new era in defense armaments cooperation.</FONT></FONT>
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