Productive and Technological Base

Instruments: Manufacturing and Services
Instruments: Globalization and U.S. National Power
Instruments: Information Technology as a Strategic Industry
Instruments: The Defense Industrial Base


The productive and technological base of a nation is the foundation of its national power. As Hemocrates noted 2400 years ago, the ability to wage war--as well as to influence events in the world without using military power--depends to a large degree upon a nation's wealth. A strong productive base provides the means and leverage for action and can significantly enhance a nation's prestige and ability to influence the outcome of international events.

The view that the productive and technological base is the foundation of national power was expressed in 1989 by Harvard scholar Paul Kennedy in The Rise and Fall of the Great Powers:

[The] historical record suggests that there is a very clear connection in the long run between an individual Great Power's economic rise and fall and its growth and decline as an important military power...Technological and organizational breakthroughs...bring greater advantage to one society than another.

For over forty years, U.S. strategic policy was directed at maintaining a technological edge over the USSR. The Cold War was, to a significant extent, a contest between the superpowers' productive and technological bases. The United States and the Soviet Union devoted large portions of their respective national wealth and productive capacity to wage the Cold War. As the conflict progressed, the productive bases from which these nations' power arose diverged significantly.

Although the rate of increase of U.S. gross domestic product (GDP) slowed considerably after the mid-1960s, all except three of the thirty years between 1965 and 1995 saw real growth in the economy. While it is difficult to secure reliable GDP data for the former Soviet Union, it seems clear in retrospect that the Soviet productive base suffered some long and serious setbacks in the last decades of its existence. The declining Soviet productive base could not support both the demands of the military establishment and the demands of the Soviet people. Perhaps more than any other single factor, this poor economic performance led to the demise of the Soviet Union as a superpower and its subsequent dissolution as a state. Had the GDP of the Soviet Union expanded at a rate of 3 percent annually instead of declining, the superpowers might still be waging the Cold War.

This chapter examines the major forces affecting the U.S. productive and technological base in the mid-1990s, and addresses the question of what role the U.S. government can play in reinforcing important sectors of the productive base and in translating industrial might into an effective instrument of national power. The forces examined are:

* The relationship between manufacturing and services.

* The impact upon national power of increased globalization.

* The rise of information technology as a strategic industry.

* The effects of downsizing on the defense industrial base.


Manufacturing and Services

The most basic distinction in the productive base (construction, agriculture, and mining aside) is between manufacturing and services, though the dividing line has become blurred as manufacturers increasingly rely upon services from outside firms.

The shift from a manufacturing to a more service-based economy may be seen in changes in employment. In 1970, 27 percent of the U.S. nonagricultural work force was employed in manufacturing. By 1993, the figure was only 16 percent. During the same period, service-sector employment increased from 67 to 79 percent. Manufacturing employment fell from 19.4 million to 17.8 million workers; and employment in services increased from 47.3 million to 87.2 million workers.

Although this shift is not a new phenomenon--as long ago as 1900, more Americans worked in services than in manufacturing--the magnitude of the shift has given rise to a number of concerns. Most pertinent here, this shift raised doubts as to whether a nation can wage war without a strong manufacturing base. But these doubts may be premature, for the strength of a nation's manufacturing base cannot be determined solely on the basis of employment trends, and waging war has become less dependent on large numbers of classical military instruments.

In fact, employment data is downright misleading: despite a decline in manufacturing employment, total U.S. manufacturing production almost doubled between 1970 and 1993--an increase of over 3 percent annually. The durable-goods sector--of which producers of military hardware are a part--more than doubled its production during the same period. Since 1982, durable-goods production increased more rapidly than total industrial output. Declining employment combined with increased output suggests that improvements in productivity have been proceeding apace.

Productivity, although an increasingly elusive quantity to measure, is the single most telling indicator of the performance of a nation's productive base. And sustained increases in productivity over time are a crucial foundation of national power. Indeed it is the relative productivity of a nation's productive base that counts, that is, not simply how productive the U.S. economy is in absolute terms but how well it is doing compared to its competitors. In addition to relative productivity performance, the sheer size of the U.S. productive base provides foundational support for national power. To take an extreme example, a super-productive small economy, such as Luxembourg, could not match the military power of a huge but generally inefficient power, such as Russia.

Between 1965 and 1995, Germany and Japan made significant strides to close the productivity gap with the United States but have not yet caught up. A 1992 McKinsey study comparing U.S. manufacturing and service productivity with that of the United States's international peers found that the U.S. still maintained an edge in overall productivity compared to Britain, Germany, France, and Japan--despite Japan's much-touted dominance in certain high-profile industries, such as metal products, automobiles, and electronic equipment.

The manufacturing sector continues to be the workhorse of productivity improvement for the United States. Regardless of its apparently poor productivity performance, the service sector too has great potential as an instrument of national power. It includes among other industries transportation and communications, both of which are significant force multipliers in the event of conflict. For example, many of the world's manufacturers have been substituting transportation and communications assets for large inventories, resulting in so-called just-in-time inventory--a process that the military can adopt, and to some degree already has.

In the past, the essential link between the productive base and national power was the ability to increase production runs of weapons. World War II and the Korean War provide prime examples of when the time necessary to close the gap between productive output and military requirements was paid for in blood and territory. However, many analysts suggest that future wars will be of short duration and will therefore be fought with on-hand weapons and munitions, obviating the need for a massive industrial mobilization.

Thus, the more relevant questions may be whether the industrial base can, on an ongoing basis, supply the new technologies and weapons that will ensure an overwhelming advantage for U.S. and allied forces, and whether the military can rapidly incorporate these new technologies into its inventory. The answers are not clear.

When the Department of Defense (DOD) was the major buyer of high technology in the marketplace, it was assured first access to leading-edge technologies. DOD no longer enjoys this position in most high-tech markets: its expenditures for the latest computers, electronics, and telecommunications technology have been surpassed by a rapidly expanding civilian marketplace. This raises the issue of whether the defense-acquisition system can respond to changing needs and changing technologies fast enough so that front-line warriors have at their disposal the latest and best technology that industry can provide. The present acquisition system may be unable to shorten its delivery lead time (seven to fifteen years, as of 1995) and thus unable to take advantage of high-tech production commercial-development cycles of two to five years. The Clinton administration's Federal Acquisition Streamlining Act (FASA) of 1994 made some significant steps toward simplifying the acquisition system, but, to a large degree, the focus of FASA was on the many small procurements the government makes rather than on the acquisition of major weapon systems, where there are few actions, but each involves much money. The agenda of Vice President Gore's National Performance Review (NPR) also included the objective of streamlining procurement. FASA and NPR have thus far failed to produce significant acceleration of major systems procurement. Those undertaking acquisition reform have to overcome serious political, cultural, and organizational obstacles.

As an example, DOD's continual reliance upon outdated military specifications (milspecs) is seen by some as evidence of the acquisition system's inability to aggressively provide the best and latest technologies to U.S. warriors. While this allegation has the ring of truth, it is important to remember that in a manufacturing environment, specifications are one of the foundations of production. Additionally, there are many areas of military equipment production where there are no commercial specifications available. The issue is not simply avoidance of milspecs, but rather the identification and use of the latest and best specifications to describe the requirement.

There are many examples where the DOD acquisition system was adjusted to accommodate new threats and new realities: the Polaris missile program, the nuclear-power program, and the many secret ("black world") efforts. If the productive base is to be used effectively as an instrument of national power in this era of rapid development and obsolescence of technologies, the acquisition system will be sorely challenged to be an enabler, giving the military access to the dynamic developments in computing and telecommunications, rather than a hindrance. In a future conflict or arms race, the nation with the shortest acquisition lead time and product-cycle time will have a distinct advantage.

Globalization and U.S. National Power

The environment in which the U.S. productive and technological base operates has changed dramatically since the end of World War II. That changing environment has affected the ability of the United States to use its productive and technological base as an instrument of national power.

The environment may be characterized as one of increasing global economic interdependence, that is, globalization. Both the work force and the manufacturing base are increasingly global. Capital flows over national borders essentially unimpeded. Globalization has been greatly facilitated by the peace among the major industrial nations since 1945, the revolutions in telecommunications and transportation, technological changes in the manufacturing processes, and the rapid increase in world trade.

Globalization has advantages and costs. On the one hand, it promises ever improving levels of efficiency and quality--provided that trade barriers are not erected by those nations that perceive themselves to be at a disadvantage. On the other hand, it is perhaps the single most important threat to national sovereignty in the mid to late 1990s. There is an inherent conflict between the idea of economic openness and the desire for national control. The continued reluctance of the nations of the European Union to embrace a single currency and a single central banking system, despite much rhetoric favoring such institutions, is a clear example of this conflict.

Indicators of Globalization. In 1959, U.S. exports accounted for 4.2 percent of GDP. By 1993, this figure had grown to 10.4 percent. Of this, about one-quarter is services and one-tenth is agricultural products. Services is the fastest growing portion of U.S. exports. At the same time, advanced technology products account for more than 23 percent of total U.S. exports. Between 1990 and 1993, the U.S. trade in advanced technology products increased by more than 16 percent.

Perhaps the most significant change in the nature of U.S. trade is the substantially increased role of multinational corporations and intrafirm trade. In 1990, multinational firms accounted for more than 75 percent of the total U.S. trade in goods. It is estimated that about one-third of U.S. exports goes to multinational firms' own subsidiaries abroad. Another one-third is exported from foreign-owned companies in the United States to their parent firms' own countries. To further compound the confusion over national production and trade, the import content of U.S. exports rose from 10 percent to 14 percent between 1987 and 1992.

While the United States and the world have seen rapid growth in trade, increases in international financial transactions and investment have been even more significant. In 1993, about $1 trillion per day was traded around the world in a globalized exchange market that never closes. The rapid increases in capital movements and market influences on exchange rates have done much to circumscribe the power of national central banks. The September 1992 failure, in the face of market opposition, of the Bank of England's efforts to maintain the prescribed value of the pound sterling within the European Exchange Rate Mechanism illustrates the point.

Foreign direct investment in the United States grew from $83 billion in 1980 to more than $445 billion in 1993. Japan has 22 percent of the total, compared to 59 percent for the European Union (including 21 percent for Britain and 15 percent for the Netherlands). Thirty-eight percent of foreign direct investment is in manufacturing, 9 percent in petroleum, 10 percent in finance, and 16 percent in retail and wholesale trade. U.S. affiliates of foreign companies accounted for almost 6 percent of U.S. GDP in 1992, compared to 4 percent in 1987.

By contrast, from 1980 to 1993, U.S. direct investment abroad grew from $215 billion to $548 billion, of which 18 percent is invested in Britain and 13 percent in Canada. Europe remains the most popular location for newly acquired affiliates, which indicates that access to well-ordered and established integrated markets seems to outweigh access to low-wage labor markets in direct U.S. investment decisions. Thirty-eight percent of U.S. direct investment abroad is in manufacturing, while petroleum accounts for 11 percent, and finance 26 percent.

Worldwide Information Technology Sales, 1993

Manufacturing, petroleum, and finance interrelations raise the possibility of one government's using leverage in other countries to influence the outcome of global issues. On the surface, it may appear from the relative balance of U.S. and foreign direct investments that other governments may have as much potential leverage as the United States. However, this is not the case. For while total direct foreign investments in the U.S represent 6.6 percent of U.S. GDP, the United States has considerably larger relative investments in other countries. For example, 1991 U.S. direct investment in Britain represented about 7.7 percent of their GDP, while British investment in the U.S. was only 1.8 percent of U.S. GDP. The same can be said of almost all other countries except Japan, whose direct investment in the U.S. is 1.6 percent of U.S. GDP, while U.S. investment in Japan is only 0.7 percent of the Japanese GDP.

Globalization and U.S. National Influence. Use of any economic leverage power to influence international outcomes needs to be country specific and industry specific. The U.S has potentially more influence in some countries than in others and is clearly more vulnerable to return influence by certain countries.

The same specificity may be required if trade is to used as a lever of national power. The U.S. relationship with Japan and China are perhaps extreme examples. China's exports to the United States grew from $2.8 billion in 1987 to $22.8 billion in 1993, giving the U.S. perhaps some influence not previously held with China. By contrast, the large and pervasive trade deficit with Japan places U.S. national power in some question. Some suggest that the U.S. enjoys the perverse power of the debtor over the creditor who threatens nonpayment.

Nonetheless, because of its historic position favoring free trade, the size of its market, and its industrial power, the United States is in a unique position to use the global marketplace as an instrument of national power. In some contexts, the promise of access to U.S. markets or the threat of exclusion may have an impact on the outcome of events. However, it is important to recognize that this form of U.S. influence has declined relatively as other nations--particularly Japan and the European Union--have acquired significant wealth and productive power.

Any exercise of U.S. power in the industrial realm must recognize the increasing influence of multinational firms in the global market. The international firms operating within the global marketplace are major new stakeholders in the quest for global stability and therefore are potential allies to which the United States may turn in a variety of situations. The goals of multinational firms often coincide with those of the U.S. government. Both are interested in global stability, the peaceful transition of political power, the creation and maintenance of free markets, free access to raw materials, access to the global manufacturing base, the removal of trade barriers, and the establishment of internationally applied product standards and rules of ownership.

Growth of U.S. Information Industry

There is not only a global marketplace but--of greater national security interest--a global manufacturing base. It is increasingly difficult to identify a manufactured product as "Made in America." The U.S. military has become more dependent upon items with significant foreign content, especially as more and more defense hardware is purchased from commercial sources rather than traditional defense-industry sources. Still, reliance on foreign sources may be less militarily significant now than it would have been in the past. As discussed below, future wars are likely to be fought with the equipment on hand rather than with weaponry produced during a long, extensive mobilization of the domestic industrial base.

Information Technology as a Strategic Industry

Certain industries are generally considered to be more important than others to a nation's economy, power, and prestige. There is a debate in the United States over how to identify such industries and what--if anything--the U.S. government should do to support them and to ensure they are fully exploited to the national advantage.

A strategic industry may be defined as one that causes significant economic growth in excess of its own value. History provides many examples of strategic industries: railroads and agriculture in the United States; textiles, railroads, and coal in Britain; and the chemical industry in Germany. Each of these cases suggests a connection between new technology and strong economic growth not just in the strategic industry itself but in related industries as well.

For example, the U.S. railroad industry, with heavy government support, spurred growth in the steel industry with its demands for massive amounts of steel for rails, bridges, and equipment; it also substantially stimulated the machine tools industry, the telegraph industry, and the coal industry. Moreover, the growth of the railroads provided a cheap means to move bulk agricultural products to market, thus substantially reducing the cost of these products and providing consumers with a better diet. Similarly, railroads provided cheap transportation for coal and pig iron, thus indirectly stimulating heavy industries.

Strategic industries also exist today. Whether government takes a role in fostering them is essentially a political decision. Historically, the U.S. government has supported strategic industries in a variety of ways: through outright ownership, as with the Tennessee Valley Authority and the National Aeronautics and Space Administration; protection from some of the rigors of free markets, as with agriculture; subsidies for research and development support, as with semiconductors; and provision of a market for new technologies before they are commercially viable, as with DOD support of computers.

Percentage of Households with PCs and Modems, 1994

The information industry today holds the most convincing claim to the status of a strategic industry. As an element of national power, the U.S. information industry generates considerable wealth in its own right. It also provides foundational support to the whole of the U.S. information economy, estimated by some at 36 percent of U.S. GNP in the mid-1990s. The information economy is defined as the confluence of computer hardware, software, telecommunications, and the value-added information-provider sector. Historically, there were clear boundaries between hardware, software, telecommunications, and service providers. Such is no longer the case. Now, they are inextricably linked to form a very powerful source of economic and productive energy that can be leveraged at the national and international level.

The question of what role Washington should play in supporting strategic industries in the information age usually divides respondents into two camps: those who want the government to allow the free markets to work, and those who favor government support for strategic investments in the most promising future technologies.

The historical record suggests that the government can play a constructive role. But success in supporting railroads, agriculture, mining, and air transport, for example, is counterbalanced by Washington's tendency to become a captive to those industries as they mature and become politically powerful. The challenge is to identify and support dynamic, emerging industries that are a potential source of national power and wealth and avoid long-term capture.

U.S. firms have long been at the forefront of the information industry. Microsoft's MS-DOS or Windows operating systems run over 80 percent of the world's personal computers. The software industry grew by 11 percent in 1994, making it the fastest-growing service business in the United States. With the deregulation and privatization of telecommunications markets around the world, U.S. telecommunications firms are becoming strategic partners with newly privatized telephone providers in foreign markets. More important, joint ownership or access to foreign telephone markets provides an entree for a plethora of information-service providers. Distinctly American information-service providers (Prodigy, America Online, Compuserve, Dun and Bradstreet, and others) offer a variety of services that instantaneously link customers with far-flung sources of information. The United States maintains a huge $3 billion trade surplus in information-related services, including those of information providers such as Mead Data Central, the company that runs Lexis and Nexis.

Measuring the Information Economy

Most economists agree that the production and dissemination of information are playing an increasing role in the United States and other advanced economies. However, there is no widely accepted methodology for calculating the size of the information economy. A handful of economists have attempted to measure the size of the information sector of the U.S. economy by means of various complex methodologies. In 1962, Fritz Machlup (The Production and Distribution of Knowledge in the United States) calculated that in 1958, 32 percent of the U.S. work force was engaged in knowledge-producing activities. In 1977, Marc U. Porat and Michael Rubin (in a nine-volume report for the U.S. Department of Commerce entitled The Information Economy) concluded that in 1967, the sector in which information was the main output accounted for 25.1 percent of U.S. GNP, and information activities within noninformation industries accounted for 21.1 percent. Lastly, in 1986, Michael Rubin and Mary Huber (in The Knowledge Industry in the United States, 1960-1980) concluded that in 1980, 36.5 percent of the U.S. GNP could be attributed to knowledge production.

Even if one narrowly defines the economy's information sector, the industrial and service sectors are increasingly dependent upon the use of information in their productive activities. For instance, the capital spending on information machines in the U.S. economy has exceeded spending on traditional industrial equipment.

In the late 1980s, some analysts predicted that Japan and Pacific Rim countries would dominate high-tech markets. This has not happened, nor is it likely to occur in the foreseeable future. U.S. companies are still the foremost innovators, standard-setters, and market leaders of the information revolution. Five of the top six computer makers are headquartered in the United States. Intel leads the semiconductor business, Microsoft tops the PC software market, and Motorola is the international leader in cellular technology. Further, the United States leads the world in connectivity, household computing power, household connectivity with external information providers, electronic commerce, and other facets of the information industry.

U.S. policy can influence the behavior of nation-states or regional geopolitical jurisdictions by establishing policies that influence who may participate in and have access to the opportunities available in the United States. Additionally, influence can be brought to bear by employing the principle of reciprocity. If country X does Y, then U.S. policy will permit that country to accelerate its development of a technically advanced information infrastructure.

As an element of national power, the U.S. capability to leverage its edge in the information industries depends upon the ability of U.S. providers to establish de facto technical standards by dominating worldwide markets, and to innovate future generations of information products and services. For example, in 1995 Microsoft's MS-DOS and Windows software functioned as a standard for PC operating systems throughout much of the world. Application software developers therefore had to develop programs that operated within Microsoft's environment if they hoped to penetrate world markets. Japanese firms did much the same in the less strategic VCR industry.

Underpinning the development of future generations of information-technology applications and products is the ability to innovate. Technological develop-ment is, in turn, dependent on access to the requisite intellectual capital. Technological innovation will migrate, physically or electronically, to areas, regions, or countries where the intellectual capital resides. Maintaining a leadership position within the global-information industry therefore requires a world-class educational and cultural infrastructure to produce the human capital to develop new generations of information-technology products and services. It also requires the creation and maintenance of the structural capital--that is, the networks, information systems, and information repositories--that is the foundation for innovation.

The Defense Industrial Base

The current wisdom holds that future conflicts will be fought with off-the-shelf systems and technologies, and the major challenge for the U.S. defense industrial base will be to replace forces lost in conflicts rather than to handle massive, sustained production runs. Given the inventory and age of defense hardware in 1995, coupled with the unlikelihood of a serious conflict, the capabilities of the defense industrial base will probably not be tested seriously until obsolescence begins to threaten defense capabilities early in the next century. The crux of the argument over support of the defense industrial base beyond current needs is the issue of whether what remains of the base in the future will be able to respond in a timely manner to the requirement to replace obsolescent equipment or, indeed, to support a long, hot war if predictions of relatively short conflicts prove wrong. It is unclear what would be the cost in time and money to reconstitute the once highly prized skills that are being allowed to languish.

The defense base reaches more deeply into the U.S. industrial base than is often understood. For example, it supported much of the high-tech research performed in the United States since the Second World War. As recently as 1990, it directly or indirectly employed about a quarter of all engineers, consumed about 15 percent of durable-goods output, and supported half of all computer research.

US soldier demonstrating laptop use in the Field

The decline in U.S. defense procurement spending began in 1985 and continued in the first half of the 1990s. The reduced military spending hit hard at the defense industrial base. Defense procurement went from a FY 1985 peak of $136 billion to $42 billion in FY 1996 (in FY 1996 dollars), that is, from the equivalent of 2.4 percent of GDP to 0.6 percent. And these numbers understate the problem for defense firms, since procurement of goods with a large civilian market, like food and personal computers, fell proportionately less than the purchases of major weapons systems, which is the key issue for the traditional defense industrial base.

The response by defense firms to the decline has focused on mergers and consolidations in order to ensure a competitive position. The essential question is whether U.S. defense firms, despite the very significant decline in defense procurement, remain capable of satisfying the materiel requirements to support the use of national power.

Contrary to popular belief, the defense industry is not simply a few large contractors that work exclusively to supply weapons for the Department of Defense. True, there are some cases in which only a single or a few suppliers of a particular system exist; but such suppliers typically engage some 800 to 1,000 subcontractors, who contribute about 60 percent of the value of delivered systems. Additionally, the vast majority of companies that do business with the DOD also undertake significant commercial work. John Alic and Harvey Brooks reported in Beyond Spinoff that the 67 largest prime contractors obtained only about 9 percent of their revenues from defense work, even during the height of the Reagan buildup.

Thus, the prime firms in the defense industry have a more varied customer base than is generally supposed. Subcontractors do not usually rely solely upon defense work either. Rather, most defense contractors are prepared to adapt to market forces as military orders dwindle, and most will probably continue to be capable of providing needed goods.

However, certain industrial segments and technologies are so unique to defense that no commercial market for them exists or is likely to exist. Thus, despite the overall health of the manufacturing base, there are some very critical defense industrial activities where no commercial applications would sustain a company or production line between defense orders. In this category are laser guidance, stealth technology, and submarine construction, among others. These specialized items can be produced only with direct government support.

Thus, Washington has to face the policy dilemma of which companies to support, and why. Ideally, the government would make these decisions based on a clearly articulated, high-priority military requirement, coupled with an extensive cost/benefit analysis. But the connection between grand strategy, military requirements, and actual production is tenuous in the best of times. During a significant reduction in forces and the subsequent contraction of support facilities and the defense industrial base, the question of what to save ultimately will be decided on Capitol Hill as part of the political debate. The decision process surrounding the Seawolf submarine is a case in point--regardless of the decision's merits.

The defense base faces at least two major challenges: continued restructuring to ensure survival in an era of modest defense spending, and competition in the global marketplace with foreign suppliers that are vying for a declining export market. The most overt response to these challenges has been an increased effort among defense firms to collaborate in the development and production of new systems so as to reduce risks, increase access to technologies, and share up-front costs. Such collaborations include the teaming of U.S. prime contractors for the duration of a project, as well as international collaborations, sometimes with government-owned foreign companies.

This collaborative trend within the United States may ensure the survival of a viable U.S. defense industrial base. But when partnerships between U.S. and foreign firms are involved, new concerns emerge. International collaboration implies either sharing or partitioning information so that neither party can make the unit individually. Partitioning arrangements may significantly affect U.S. ability to exercise unilateral action in pursuit of its national security goals. For example, General Electric (GE) and SNECMA of France jointly manufacture the CFM-56 aircraft engine, which is used in military (the KC-135R air-refueler) and many civilian aircraft. Neither company manufacturers the complete engine. Rather, GE makes the "hot section" and SNECMA makes the "cold section." Each company assembles complete engines using the other's sections and then delivers them to customers. Although France's
status as an ally makes disruptions in the exchange of sections unlikely, this example illustrates the vulnerabilities that can be incurred by cross-border defense ventures: U.S. capability to expand its air-power projection could be severely hampered if France chose not to allow cold section shipments to the United States. GE could, of course, manufacture CFM-56 cold sections given sufficient time and resources.

The Seawolf Submarine

At the height of the Cold War, the Navy's plan had been to buy three Seawolf submarines a year for six years, costing some $33.6 billion. President Bush in May 1992 called for cancellation of the Seawolf submarine production program except for the one boat under construction at the General Dynamics electric boat (EB) division in Groton, Connecticut.

The opponents of the cancellation decision included the congressional delegations from Connecticut and Rhode Island, who were concerned with the cancellation's economic impact. Besides the loss of thousands of jobs, they argued that loss of Seawolf production would place in grave jeopardy one of the nation's two nuclear-capable shipyards. EB strongly maintained that it could not continue to make submarines without at least one new order a year. Additionally, responding to a future military threat would be more costly if EB were to lose its highly trained, specially skilled work force.

President Bush's supporters argued that Seawolf was no longer needed and was too costly, particularly in light of the demands for tax cuts, reduced federal spending, and the need to balance the budget. The Seawolf had long been a target of criticism from Senator John McCain (R--Arizona), a staunch supporter of defense, who maintained that the submarine was too expensive and the money could be better spent on other Navy needs. The House and Senate eventually agreed on funding a second Seawolf, which was acceptable to President Bush.

In September 1993, President Clinton--who had announced in March 1992 during the Connecticut primary his support for either two or three Seawolfs--confirmed a third submarine would be built at a cost of $2.3 billion at EB. Newport News, the other nuclear-capable yard (in Newport News, Virginia), was slated to receive an order for a new aircraft carrier.

After the November 1994 election, the Seawolf was again under attack, with Senators McCain and John Warner (R--Virginia) identifying as wasteful some $8 billion in spending, including Seawolf production. The Congressional Budget Office in May 1995 lent support to the critics of Seawolf when it questioned the military need for a third Seawolf and stated that construction of the third submarine would do little to help the vital subcontractors in the submarine industrial base. Virginia Senators Charles Robb (D) and Warner joined forces and strongly objected to the Navy's plan to continue to bypass competition by giving the order for the third Seawolf to EB. The Navy, however, maintained that by preserving the nuclear shipbuilding base in the mid-1990s--with orders to both EB and Newport News--competition to build nuclear-powered ships would exist for the next decade.

In June 1995, the House voted to cancel the third Seawolf and use the savings to improve the second Seawolf and start the new line of advanced--more affordable--submarines. However, Congress accepted in November 1995 the proposal crafted by Senator Warner, under which the third and final Seawolf would be built by EB, which would also get the order for the lead boat of the new submarine class in 1998, but Newport News would get the order for the second new-class boat in 1999. From then on, there would be competition for the planned twenty-eight follow-on orders. This plan preserves the skill base at EB until the next-generation order is received, and provides for future competition between EB and Newport News.

The Seawolf debate was a mixture of many different elements, but most emphasis was on preserving jobs. Apparently, less consideration was given to Russia's continued submarine-building program. A troubling aspect of the Russian defense structure since the end of the Cold War is the emphasis on submarines. Production of the improved Akula class has continued at much the same pace as in the late 1980s. Additionally, construction of a new ballistic submarine class began in December 1993. In the new boats, the Russians--thanks to their own technical skill and to borrowed Western technology--have largely closed the gap with the U.S. in quietness, one of the major measures of submarine quality. By 2000, the Russian nuclear submarine force may be 80 boats, most of which will be about as quiet as the 70 boats the U.S. will have then.

Sea Wolf Submarine

Washington could also exploit such arrangements by blocking shipments to a collaborating company if doing so would serve some compelling national interest. Collaboration is more and more common as increasing numbers of U.S. and foreign companies develop arrangements for development and production. The usual arrangement is similar to the GE/SNECMA model: each makes part of the product, while sharing as little technical data as possible. These commercial arrangements are usually undertaken to share costs and risks, to obtain technology, and to facilitate market penetration.

As defense firms continue to downsize and embrace international collaborative efforts to ensure survival, the U.S. defense industrial base loses some of its unilateral ability to respond to sovereign interests. Washington has the power to reverse these trends through direct intervention in the defense industry, but economic and political realities run counter to creation of a policy broadly supporting the declining base.

Besides a diminished threat and rapidly declining defense dollars, there has been a fundamental shift in the way DOD approaches acquisition. Defense is increasingly relying on commercial products for major portions of its high-technology equipment. The old system of heavy DOD R&D funding followed by procurement is gone. In its place is a reduced DOD presence in the R&D market. The need is to capitalize upon rapidly changing market-driven products so that DOD can take advantage of the latest technologies and commercial economies of scale. The old, unique defense supplier base is unaffordable. It lacks the means to exploit rapidly new technologies and fails to take advantage of commercial-sector production economies.

The government's challenge is to adapt its acquisition system to make the defense market more commercial friendly in order to gain maximum advantage of commercial technologies and prices while maintaining required defense-unique capabilities. Specific military mission analysis can assist in identification of necessary defense-unique products. Formulating policies to protect and foster unique capabilities is no trivial task, being fraught with political difficulties and serious trade-offs: for example, national versus collaborative development and production, domestic versus foreign sourcing, current capability versus future capability, and competition versus sole sourcing. The alternative is to let the political process or the marketplace decide. That alternative may, in fact, be more efficient than generally credited.


The U.S. productive and technological base is quite strong and doing well in comparison with its foreign peers, providing a solid foundation for the exercise of national power. Yet, the base is constantly changing. The major forces affecting the base include:

* A sharp rise in the service sector coupled with a steady growth in manufacturing production.

* A greater reliance upon trade as a source of national income.

* Increased globalization of information, manufacturing, and finance.

* Expansion of the role of international firms in world affairs.

* The rise of information technology dominated by the United States.

* Reduced defense expenditures for R&D and procurement, resulting in a downsized defense industrial base.

* A significant change in defense acquisition focus toward increased use of commercial items and technology.

The issue of the proper role and goals of the government to foster and protect the productive and technological base as an instrument of national power is unresolved. The challenge for the United States is how to harness the economic growth capacity of new technologies and industries so as to remain the world's premier power. The debate continues over the appropriate goals and role of the government in preserving manufacturing skills unique to defense requirements.

Despite the debate, the productive and technological base remains a firm foundation of national power against which a number of instruments may be leveraged to influence the outcome of world events. These instruments include:

* The control of access to the U.S. domestic market and U.S. technology, including information technology.

* Use of the foreign affiliates of U.S. firms to influence local events, at least by demonstration of "enlightened" policies.

* Maintenance of the appearance, if not the reality, of great industrial might (including the defense industry) to forestall potential adversaries.

* Efforts to demonstrate, if no other way than by example, the promise of greater economic and political well-being through participation in the global marketplace, which requires political stability, maintenance of free markets and sources, removal of trade barriers, establishment of international standards, and rules of ownership enforceable under law.

The U.S productive and technological base is inextricably woven into the fabric of the global marketplace. It cannot retreat without incurring serious costs. As in the past, economic interrelationships offer the promise of increased stability and peace in the world. The productive and technological base can be used as an instrument to support and enhance U.S. interests globally, but not without consideration of the enablers and limitations resulting from the global nature of the base itself.

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