Economic Model Recommendations

Monday, November 5, 2018 - 9:30am

Hon. Andrea Thompson

Under Secretary for Arms Control and International Security

U.S. Department of State

2201 C Street NW,

Washington, DC 20520

 

Hon. John Rood

Under Secretary of Defense for Policy

Office of the Secretary of Defense

1400 Defense Pentagon

Washington, D.C. 20301

 

Hon. Richard Ashooh

Assistant Secretary of Commerce for Export Administration

Department of Commerce

1401 Constitution Ave. NW,

Washington, DC 20230

 

Dear Under Secretary Thompson, Under Secretary Rood, and Assistant Secretary Ashooh:

On behalf of the U.S. Chamber of Commerce’s Defense and Aerospace Export Council, I write to bring your attention to actions that can be taken to embed economic consideration into the decision process to further implement the administration’s Conventional Arms Transfer (CAT) Policy. This submission provides recommendations for a new economic model for determining the economic impact of a pending sale.

Implementing these recommendations would enable the U.S. government to better assess the jobs, skilled labor, production, and cost implications associated with a foreign sale of a major U.S. defense program; would help augment the traditional political military interagency debate by providing an economic analysis to key inter-agency offices for consideration; and would ensure the timely submission of critical economic impact data, to include foreign availability of similar capability, to better inform the final approval or denial of a major system sale by the Department of State.   

The 2018 CAT policy recognizes economic security as essential to U.S. national security, but this in itself has no impact on American industry’s ability to compete internationally. Real change will only come when this declaration is translated into governmental directives and procedures that institutionalize serious consideration of the economic impact of U.S. export control decisions. A clear test of implementation is the U.S. government’s ability to provide data when asked about the cost to U.S. industry of license denials and deferments. There will be many instances when export denials are in the best interest of the United States, but the only way American industry can be confident our government has fairly considered the costs of such denials is through evidence that the staff has crunched the numbers. If a Senator asks the Secretary of State about the economic impact of export control policies, the Secretary should be able to give that Senator both a qualitative and quantitative reply.

The implication of the Administration’s CAT policy is that economic consideration may be a priority in a proposed sale globally whereas previously it was not.  If economic considerations were included as an element of the decision process in the past, this was most often limited to the Service managing the item under consideration for a foreign sale.  And although at times economic considerations where also discussed at the Office of the Secretary of Defense (OSD) and State Department, it was done so informally and was not viewed as having the same weight as other considerations such as regional stability and recipient nation human rights issues. This sounds encouraging from an industry perspective but as a prior acquisition official noted on the doorpost to his office: “In God we trust, all others must bring data.”

The challenge now is how best to accurately and quickly capture the economic implications associated with each significant transfer and who should be tasked with such an effort?  How do we institutionalize the focus on the economic implications of a significant transfer and do so credibly?  How do we ensure that the process institutionalized is one that does not add time to the USG decision process further delaying industry ability to respond to a foreign solicitation on time?

In our June 8, 2018 letter to the administration, we suggested that the State Department, when considering a license request (Direct Commercial Sale (DCS)) or a letter of request (Foreign Military Sale (FMS)) or combination of both (hybrid sale), must formally consider the economic impact (i.e. lost per unit price reduction) to the U.S. Military Department that manages the defense item under review for transfer, to include implications for the U.S. national security industrial base health including the sales contribution to the development of emerging technologies and effect on U.S. global market share. 

The global market share implications are a critical consideration as lost market share today, for significant military capability that will be used by foreign military forces for three decades or longer, is market share not recaptured easily at some later date.  Furthermore, economic impact considerations must also include whether the denial of the export item in question will or will not result in the denial of the military capability or a near equivalent capability.  That is, if the U.S. denies the request, will the end user at issue get the same or similar equipment from a foreign supplier? 

The National Defense Authorization Act of fiscal year 2019 (NDAA 2019), SEC. 1752 reinforces the consideration of economic impact by stating “…use export controls only after full consideration of the impact on the economy of the United States...” Furthermore, this section of the Act states

“The national security of the United States requires that the United States maintain its leadership in the science, technology, engineering, and manufacturing sectors, including foundational technology that is essential to innovation. Such leadership requires that the United States persons are competitive in global markets. The impact of the implementation of this part on such leadership and competitiveness must be evaluated on an ongoing basis and applied in imposing controls…to avoid negatively affecting such leadership.” 

SEC. 1754 further states “…establish a process for an assessment to determine whether a foreign item is comparable in quality to an item controlled under this part, and is available in sufficient quantities to render the United States export control of that item or the denial of a license ineffective…”

To move forward with an economic impact model that will be credible and timely, we suggest the following steps.

  I. Assessing Impact of International sales

Within the DoD, the Service Program Managers (PMs) and their Program Executive Officers (PEOs) are responsible for developing systems and capabilities that meet their individual Service requirements.  PMs, who report to PEOs, work directly with our military industrial complex on a daily basis, via USG awarded contracts, to bring capability to their uniformed personnel, allies and international partners.  The PMs, their PEO and political acquisition executive relationship with the leadership of their corporate counterparts places the Service acquisition community in a unique position of determining the direct impact of an international sale.  The impact can include:

A. Per unit price reduction for the Service on their own domestic acquisition;

B. maintaining a warm production base when the Service is short on annual funding;

C. leveraging international acquisitions to partially fund the transition to the next generation capability of a military platform;

D. leveraging international acquisitions to restart a dormant production line thus saving the Service that expense; and

E. leveraging international sales to protect uniquely skilled labor not easily replicated, just to mention a few.

II. Timing

The challenge is often timing.  Industry predictions with respect to impact can vary month to month as the acquisition environment for some platforms and industries is fluid when DoD Service funds are diminishing or at risk of evaporating completely. The timing of international sales is far less predictable than domestic acquisitions thus further complicating industry impact predictions in some cases. 

III. Credibility

Ensuring credibility in this process means determining who is best tooled as an independent voice to assess a Service PM and its industry impact statement with the objective of rendering an opinion on the position provided.  The Director of Cost Assessment and Program Evaluation (CAPE) provides independent analytic advice principally to the Secretary of Defense on all aspects of the DoD program, including alternative weapon systems and force structures, the development and evaluation of defense program alternatives, and the cost-effectiveness of defense systems. CAPE also conducts analyses and offers advice in a number of related areas. 

CAPE’s staff is approximately 150 individuals comprised of military, civil servants and contract support.  This staff is drawn from a variety of disciplines including physics, economics and engineering and as such, they are highly regarded as some of the most capable analyst in the building.  Their charter to routinely assess and reassess DoD programs, and knowledge of the industries producing those programs, places CAPE in a uniquely informed position to quickly render an opinion on a PM produced economic impact statement for a specific international sale.  Although their workload is such that CAPE would resist an expansion of their responsibilities to do such assessments for MDE and SME proposed sales, the SecDef could direct them to do so and find a way to augment their staff to accommodate the workload.

IV. Summary

The following eight recommendations comprise the recommended “model” for determining the economic impact of a pending sale:

1. The economic data to be collected is not proscribed.  Fundamentally, the objective is to understand the jobs, skilled labor, production, and cost implications for a go/no-go decision on a foreign sale of an SME or MDE program.  This can include micro, macro or a combination of both as data collected to tell an impact story.  Furthermore, we will rely upon the prime contractor to adequately represent the economic impact to his/her sub-tier suppliers.

2. The PM will be responsible for engaging with their industry partner to determine the economic impact considerations and the PM will draft the impact statement.  That statement will be collected by the Service International component responsible for providing the Service position to OSD for either a commercial license request or an FMS LOR (DASA DEC; SAF IA; Navy IPO).  The Service will partner with their OSD counterparts to develop the narrative needed to augment the political military interagency debate specific to contentious transfers whereby a full debate within the Administration is warranted to determine a go/no-go transfer recommendation to the US Congress. For nonstandard program configurations, the same process will apply and will be conducted by the DoD Service and its PM who has been assigned program management responsibility for the non-standard system under interagency consideration for a go/no-go transfer decision.

3. The OSD component receiving the Service position (DTSA, DSCA) will be responsible for sharing the economic analysis with CAPE who will assess the impact statement and formally post their opinion and will do so within a reasonable time.

4. The OSD component receiving the Service position (DTSA, DSCA) will be responsible for sharing the economic analysis with the Deputy Assistant Secretary of Defense for Industrial Policy, Commerce BIS and ITA for comment.

5. The OSD component (DTSA, DSCA) will formally submit all justification elements supporting approval or denial of a major system sale to the Department of State consistent with current procedures specific to commercial licensing and FMS LOR processing.

6. The Defense Intelligence Agency will develop the capability to contribute to industry assessments regarding foreign availability of similar or near equivalent SME and MDE under review for export by US licensing authorities and provide their assessments to DTSA and DSCA annually.  The same should be shared with industry by the OSD component (DTSA, DSCA) and a process should be established to allow industry to comment on the interpretation of the data collected with respect to foreign parity/availability.  Ultimately, it is critical to ensure both industry and the USG have the same position on this issue and where this is disagreement, an understanding as to why there is such disagreement.

7. The OSD component (DTSA, DSCA) will ensure current data is used to assess the economic impact and that staff are informed regarding where the “library” of current economic data resides to ensure its use in the decision process.  Too often dated material is used to guide the decision process. 

8. As such, the Secretary of Defense should direct the Service Secretaries of the U.S. Army, U.S. Navy and U.S. Air Force, the Under Secretaries of A&S and Policy, and the Defense Intelligence Agency to implement this model to address both the Administration CAT policy change and the NDAA 2019 direction specific to the economic impact of significant military capability to a foreign ally or friendly partner.

 

Sincerely,

 

Keith Webster