Battle Brewing Over Where Pentagon Shops for Its Wares

How much US military hardware should be stamped "Made in USA"?

The question lies at the heart of growing trade frictions between the United States and its European allies - with important implications for American jobs.

Currently, the Pentagon has a list of military items it is required to buy from US manufacturers, down to anchor chains and ball bearings. But Western European countries have long wanted more access to contracts from the Pentagon, the world's biggest weapons buyer.

The Defense Department, NATO allies, and, ironically, major US armsmakers are promoting a Senate measure to do just that. They say the measure would be a largely symbolic but important demonstration of America's intent to open up its highly protected domestic defense market. Absent such a move, they warn, Western European nations might begin looking elsewhere to buy military equipment - a move that may cost American jobs and eventually trigger a trade war.

But critics of the measure also cite the need to protect US workers. They say the measure, sponsored by Sen. John McCain (R) of Arizona as part of the Senate version of the fiscal 1997 Defense Authorization Act, would harm US firms. Opposition is fierce in the House, and a battle looms over the House-Senate conference that will meet later this summer to reconcile different versions of the act.

In passing its version last week, the House adopted new protectionist measures, including an amendment requiring the Pentagon to begin judging contract bids in part on the amount of work to be performed in the US. The amendment's sponsor, Rep. Richard Durbin (D) of Illinois, says: "These are good-paying jobs, and they are good-paying jobs that should stay in the United States."

While those on both sides differ over what's best for the economy, they agree on the cause of their dispute: escalating competition in the international arms trade.

With the end of the cold war, the global arms trade has shrunk from about $76.5 billion in 1988 to $35.7 billion. The US still controls the largest share of the international market - about 35 percent. But the massive downturn, coupled with lower US defense budgets, has profoundly affected American arms producers. Many of the largest firms have been forced to merge, and smaller contractors have had to close or find new businesses. The US has lost an estimated 1.5 million defense industry jobs since 1987, with another 250,000 at risk.

Adding to the fallout is a growing trend among major US defense contractors to "outsource" portions of their contracts to overseas companies. Contractors here use outsourcing because companies abroad can complete the work at lower costs than US firms.

Given the increasing insecurity expressed by the US labor force as a whole, the domestic-content fight has taken on enormous political import. The stakes are particularly high for lawmakers from states with smaller defense contractors. To protect those firms and their workers, representatives from those states try to ensure that local defense-industry products are included under "buy American" requirements in the Pentagon annual spending plan.

Senator McCain's legislation would grant the Pentagon power to waive "buy American" restrictions for items placed on the list in fiscal 1996. For the most part, each item is made by only one or two companies. Aside from anchor chains and ball bearings, they include goods such as lifeboats, naval steering controls, and propellers.

THE Clinton administration is divided on McCain's proposal: The Pentagon supports it because it saves money, but the Commerce Department opposes it because US companies may lose contracts to overseas competitors. Says a Commerce Department official: "We worry about the defense industrial base. We worry about the guys who make ball bearings, the guys who make propellers, the guys who make basic components."

NATO allies, however, see McCain's legislation as a test of US willingness to begin leveling a playing field that major American arms makers have long dominated.

"The Spanish ambassador has been into the Pentagon on this anchor chain restriction and said that they [Madrid] would have to think about whether they would buy US airplanes in the future," says a senior defense official.

Western European officials have long griped about the massive imbalance in the transatlantic defense trade. But their complaints have taken on new urgency as the gap has widened. In addition, European-made hardware has improved over the years - and some of it is as good or better than American-made goods. In 1988, NATO allies purchased just over $6 billion in US-made products, while selling about $2.5 billion to the US; in 1994, they bought more than $7 billion worth, while selling only $1.5 billion to the US.

Unless the US moves to open its market, European officials say, their governments could retaliate by adopting a "European preference" in arms procurements, a proposal already discussed by France.

"Market access works in both directions," says a European diplomat.

But more fundamental issues are involved, industry officials say. They insist that the "buy American" restrictions hurt US taxpayers by forcing the Pentagon to purchase US-made products that can be much more expensive than foreign-produced hardware. The restrictions also remove any incentives for older, inefficient US firms to modernize, they say.

"This is industrial welfare at its worst," contends Frank Cirasco of the international committee of the National Securities Industries Association in Washington.

Some experts say the US and its European allies can achieve a better balance in defense trade. Both sides, experts say, should forge a "framework agreement" on defense industrial cooperation.