Trends and Challenges in Aerospace Offsets

Proceedings and Papers

CHARLES W. WESSNER, Editor

Board on Science, Technology, and Economic Policy

National Research Council

NATIONAL ACADEMY PRESS
Washington, D.C.
1999



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--> Trends and Challenges in Aerospace Offsets Proceedings and Papers CHARLES W. WESSNER, Editor Board on Science, Technology, and Economic Policy National Research Council NATIONAL ACADEMY PRESS Washington, D.C. 1999

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--> NATIONAL ACADEMY PRESS 2101 Constitution Ave., N.W. Washington, DC 20418 The National Academy of Sciences is a private, nonprofit society of distinguished scholars engaged in scientific and engineering research, dedicated to the furtherance of science and technology and to their use for the general welfare. Upon the authority of the charter granted to it by Congress in 1863, the Academy has a mandate that requires it to advise the federal government on science and technical matters. Dr. Bruce Alberts is president of the National Academy of Sciences. The National Academy of Engineering was established in 1964, under the charter of the National Academy of Sciences, as a parallel organization of outstanding engineers. It is autonomous in its administration and in the selection of its members, sharing with the National Academy of Sciences the responsibility for advising the federal government. The National Academy of Engineering also sponsors engineering programs aimed at meeting national needs, encourages education and research, and recognizes the superior achievements of engineers. Dr. William A. Wulf is president of the National Academy of Engineering. The Institute of Medicine was established in 1970 by the National Academy of Sciences to secure the services of eminent members of appropriate professions in the examination of policy matters pertaining to the health of the public. The Institute acts under the responsibility given to the National Academy of Sciences by its congressional charter to be an adviser to the federal government and, upon its own initiative, to identify issues of medical care, research, and education. Dr. Kenneth I. Shine is president of the Institute of Medicine. The National Research Council was organized by the National Academy of Sciences in 1916 to associate the broad community of science and technology with the Academy's purposes of furthering knowledge and advising the federal government. Functioning in accordance with general policies determined by the Academy, the Council has become the principal operating agency of both the National Academy of Sciences and the National Academy of Engineering in providing services to the government, the public, and the scientific and engineering communities. The Council is administered jointly by both Academies and the Institute of Medicine. Dr. Bruce Alberts and Dr. William A. Wulf are chairman and vice chairman, respectively, of the National Research Council. Limited copies are available from: Board on Science, Technology, and Economic Policy National Research Council 2101 Constitution Ave., N.W. Washington, DC 20418 202-334-2200 Additional copies are available for sale from: National Academy Press Box 285 2101 Constitution Ave., N.W. Washington, DC 20055 800-624-6242 202-334-3313 (in the Washington Metropolitan Area) Library of Congress Catalog Card Number 98-89552 International Standard Book Number 0-309-06080-X Copyright 1999 by the National Academy of Sciences. All rights reserved. Printed in the United States of America

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--> For the National Research Council, this project was overseen by the Board on Science. Technology, and Economic Policy (STEP), a new standing board of the NRC established by the National Academies of Sciences and Engineering and the Institute of Medicine in 1991. The mandate of the STEP Board is to integrate understanding of scientific, technological, and economic elements in the formulation of national policies to promote the economic well-being of the United States. A distinctive characteristic of STEP's approach is its frequent interactions with public and private sector decisionmakers. STEP bridges the disciplines of business management, engineering, economics, and the social sciences to bring diverse expertise to hear on pressing public policy questions. The members of the STEP Board and the NRC staff responsible for the project are listed below: Dale Jorgenson, Chair Frederic Eaton Abbe Professor of Economics Harvard University, Cambridge, Mass. *  *  * James F. Gibbons Professor of Engineering Stanford University Stanford, Calif. Ralph Landau Consulting Professor of Economics Stanford University Stanford, Calif. James T. Lynn Adviser Lazard Freres Bethesda, Md. Burton John McMurtry General Partner Technology Venture Investors Menlo Park, Calif. Ruben Mettler Chairman and Chief Executive Officer (ret.) TRW, Inc. Los Angeles Staff Stephen A. Merrill Executive Director John C. Oldfield Program Associate William J. Spencer, Vice Chair Chairman SEMATECH Austin, Texas Mark B. Myers Senior Vice President Xerox Corporation Stamford, Conn. James M. Poterba Professor of Economics Massachusetts Institute of Technology Cambridge, Mass. A. Michael Spence Dean, Graduate School of Business Stanford University Stanford, Calif. Joseph E. Stiglitz Senior Vice President for Development Economics The World Bank Washington, D.C. Alan Wm. Wolff Managing Partner Dewey Ballantine Washington, D.C. Charles W. Wessner Program Director Lena Lawrence Administrative Associate

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--> BOARD ON SCIENCE, TECHNOLOGY AND ECONOMIC POLICY Steering Group on Policy Issues in Aerospace Offsets Alan Wm. Wolff, chair Managing Partner Dewey Ballantine Washington, D.C. James F. Gibbons Professor of Engineering Stanford University Stanford, Calif. Dale Jorgenson Frederic Eaton Abbe Professor of Economics Harvard University Cambridge, Mass. Ruben Mettler Chairman, CEO (ret.) TRW, Inc. Los Angeles Mark B. Myers Senior Vice President Xerox Corporation Stamford, Conn. William J. Spencer President and CEO SEMATECH Austin, Texas Project Staff Charles W. Wessner Project Director John C. Oldfield Program Associate Lena Lawrence Administrative Associate

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--> NATIONAL RESEARCH COUNCIL BOARD ON SCIENCE, TECHNOLOGY, AND ECONOMIC POLICY Sponsors The National Research Council gratefully acknowledges the support of the following sponsors: The White House National Economic Council The Department of Commerce Bureau of Export Administration and International Trade Administration The Department of Defense Office of the Deputy Under Secretary for International and Commercial Programs and The Defense Advanced Research Projects Agency Program Support for the Board on Science, Technology, and Economic Policy is provided by a grant from the Alfred P. Sloan Foundation Any opinions expressed are those of the participants and do not necessarily reflect the views of the project sponsors.

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--> CONTENTS Preface   xi I. Introduction   1 II. Proceedings   9     Welcome Charles W. Wessner, National Research Council   11     Symposium Introduction Alan Wm. Wolff, Dewey Ballantine And STEP Board   13     Opening Remarks Dorothy Robyn, White House National Economic Council   17 Panel I:   Offsets in Commercial and Military Aerospace: An Overview David C. Mowery, University Of California, Berkeley   19     Discussants: Sally Bath, Department Of Commerce Steve Beckman, United Auto Workers     Panel II:   The Policy Context for Military Aerospace Offsets Ken Flamm, The Brookings Institution   29     Discussants: Page Hoeper, Department Of Defense Frank Parker, ITT Defense And Electronics    

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--> Panel III:   The Effect of Offsets, Outsourcing, and Foreign Competition on Output and Employment in the U.S. Aerospace Industry Robert E. Scott, Economic Policy Institute   38     Discussants: Howard Rosen, Joint Economic Committee Gordon Healey, Defense Industry Offset Association And Bell Helicopter     Panel IV:   Offsets in the International Marketplace: An Aerospace Industry View Joel Johnson, Aerospace Industries Association   47     Discussants: Steve Clemons, Economic Strategy Institute Randy Barber, Center for Economic Organizing     Panel V:   Dual-Use Supplier Management and Strategic International Sourcing in Aircraft Manufacturing Todd A. Watkins, Lehigh University   55     Discussants: John Sandford, Rolls Royce, N.A Al Volkman, Department Of Defense     Panel VI:   Emerging Challenges And Diverging Interests Kirk Bozdogan, Massachusetts Institute Of Technology   65     Discussants: William Reinsch, Department Of Commerce Albert Kelley, Massachusetts Institute Of Technology     Panel VII:   The Role of the U.S. Government in Setting Offset Policy Owen E. Herrnstadt, International Association Of Machinists And Aerospace Workers   73     Discussants: Greg Martin, Lockheed Martin, Inc. Thea Lee, AFL-CIO     III. Papers   83     Offsets in Commercial and Military Aerospace: An Overview David C. Mowery, University Of California, Berkeley   85

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-->     The Policy Context for Military Aerospace Offsets Kenneth Flamm, Brookings Institution   115     The Effects of Offsets, Outsourcing, and Foreign Competition on Output and Employment in the U.S. Aerospace Industry Robert E. Scott, Economic Policy Institute   133     Offsets in the International Marketplace: An Aerospace Industry View Joel Johnson, Aerospace Industries Association   158     Dual-Use Supplier Management and Strategic International Sourcing in Aircraft Manufacturing Todd A. Watkins, Lehigh University   167     The Role of the United States Government in Setting Offset Policy Owen E. Herrnstadt, International Association Of Machinists And Aerospace Workers   197 IV. Annexes   213     Defense Industry Offset Association (DIOA) Position On Offset Issues Gordon Healey, Defense Industry Offset Association   215 Symposium Participants   225 Selected Bibliography   229

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--> PREFACE This volume is derived directly from the February 1997 request by the White House National Economic Council (NEC) to the National Research Council Board on Science, Technology and Economic Policy (STEP) to examine the impact of offsets on the U.S. aerospace industry. Specifically, the NEC asked that STEP organize a major workshop to examine the pressures facing U.S. companies to grant offsets in the increasingly competitive global aerospace markets for both defense and commercial aircraft and related products.1 Although cognizant of the definitional and analytical challenges associated with this subject, the STEP Board accepted the NEC's request. In accepting this task, the STEP Board's principal concern was that, in the time frame required for this initial effort, the Board would not be able to work through the analytical difficulties and overcome the data limitations associated with offsets. Consequently, the Board agreed to organize a comprehensive workshop and prepare a summary report of the workshop that would not, however, include recommendations or findings. The workshop was held at the National Academy of Sciences on June 9, 1997 and the 1   The chapter entitled "Offsets" in: Trade Promotion Coordinating Committee, National Export Strategy: Toward the Next American Century : A U.S. Strategic Response to Foreign Competitive Practices. U.S. Government Printing Office, Washington, D.C., October 1996, describes offsets as compensation packages that are part of contract negotiations for large purchases such as aircraft. This description is elaborated in the issues paper in the appendix of the National Export Strategy report. However, it is important to keep in mind that different views on offsets sometimes lead to different definitions.

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--> report, entitled Policy Issues in Aerospace Offsets, was published on June 30, 1997.2 The overarching objective of this first workshop was to provide a forum in which the various parties with an interest in aerospace offsets could come together to express their views on the practices, rationale, and current or future impact of offsets on U.S. national security, the competitiveness of the U.S. economy, especially the aerospace sector, and domestic employment in the aerospace industry. In his concluding remarks, Ambassador Alan Wm. Wolff, the workshop chair, observed that effective U.S. policy would require a broad consensus on the nature of the problems faced by the industry. This could lead to agreement on measures to maintain the domestic strength and international competitiveness of the U.S. aerospace sector. Continuing the dialogue would be a first step toward a consensus. In an effort to maintain and deepen the dialogue opened at the first workshop, the responsible agencies agreed, in conjunction with representatives of aerospace labor and industry, to ask the STEP Board to convene a second meeting. In addition to continuing the dialog, this second meeting would also provide an opportunity for the STEP Board to have the interested parties review the papers it had commissioned to explore more rigorously the issues identified in the course of the first workshop. Accordingly, a symposium was held at the National Academy of Sciences on January 14, 1998. Participants in the ''Symposium on Trends and Challenges in Aerospace Offsets" considered the gathering a success, in part because the first workshop had encouraged the frank presentation of differing views and encouraged participants to take into account alternative perspectives, even if agreement was not reached on key points. At this symposium, the use of papers as a basis for discussion added nuance and texture to the presentations and helped identify points of broad agreement as well as issues that could benefit from further exploration. Perhaps one of the most positive developments that emerged in the course of the 1998 symposium was the expansion of the terms of the debate beyond the scope, nature, and impact of offsets per se to broader issues of trade and investment and to policy issues such as streamlining adjustment assistance to displaced workers. Indeed, with regard to this latter point, many participants mentioned the need to simplify adjustment assistance programs for displaced workers. Other specific topics that emerged in the course of the symposium included calls for additional analysis of subsidies issues, for example, launch aids and export finance (including the adequacy of U.S. export finance), an assessment of the efficacy of the Multilateral Aircraft Agreement and the US-EU Bilateral Aircraft agreement and a range 2   See Charles W. Wessner and Alan Wm. Wolff, eds., Policy Issues in Aerospace Offsets (National Academy Press, 1997).

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--> of issues associated with market access. In addition there were several references to the need to review the adequacy of the U.S. investment in aerospace infrastructure, such as wind tunnels. Although these topics involve a broad range of policy questions, they do reflect recognition of the need to look at the U.S. aerospace industry, associated government policies, and the impact of foreign government policies as a whole. As with the June 1997 workshop, the discussion recorded at the symposium did not address a cluster of issues sometimes associated with offsets. For example, domestic or foreign outsourcing decisions taken on the basis of commercial considerations remained outside the purview of the symposium, as were, at the other end of the spectrum, issues of arms control and proliferation. The focus of both meetings was commercial and military offsets, both direct and indirect, that companies are required to grant to complete sales of large systems. Several papers directed specific attention to the impact of offsets on key suppliers, sub-tier producers, and employment in this important part of the U.S. industrial base. This broad area of inquiry again proved to be more than adequate for the deliberations of a single meeting. In sum, this symposium sought to achieve several interlocking objectives. Our first goal was to bring together a relatively small group of senior representatives from aerospace industry and labor in conjunction with academic experts to deepen our understanding of the offsets phenomenon and its consequences for the U.S. aerospace industry. Second, we sought to facilitate this discussion and ensure its rigor by presenting some of the best current analysis concerning the origins, causes, and current impact of offsets as well as future trends. Third, despite the different views expressed in the discussion, we sought to identify areas in which all parties agreed or partially agreed and to garner a wide range of potential policy recommendations to address the issues identified by participants. Last, in the course of the discussion every effort was made to place the offsets issue in the context of other developments and policy challenges having a major impact on the U.S. aerospace industry. The presentations of speakers and participants were a challenge to summarize. Every effort has been made to capture the main points and supporting arguments of each speaker within the limitations of a summary report. We apologize in advance for any inadvertent errors or omissions in the summaries of the participants' presentations. However, the papers necessarily provide closer argumentation and include data and source material that has often been lacking in discussions of offsets. This and the willingness of the participants to expand the framework of the discussion, mark a significant advance in the national dialogue on aerospace offsets. CHARLES W. WESSNER

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--> ACKNOWLEDGMENTS The Board on Science, Technology and Economic Policy would like to express its appreciation to the participants in this symposium for generously making available their time and expertise. The Board would particularly like to thank Dorothy Robyn, of the White House National Economic Council, for her leadership and support. The Board also wishes to express its appreciation to one of its members, Ambassador Alan Wm. Wolff for serving as chairman of this project. The Board would also like to recognize John Oldfield, a member of the STEP staff, for his contributions to the organization of the symposium and in the preparation of this volume. Lastly, the Board would like to express its appreciation to Dr. Charles Wessner, the project director, for bringing together informed representatives of labor, industry, government, and academia to discuss the impact of aerospace offsets and the challenges facing this important sector of the American economy. A number of individuals deserve recognition for their willingness to review this report. These individuals were chosen for their diverse perspectives and technical expertise, in accordance with procedures approved by the NRC's Report Review Committee. The purpose of this independent review is to provide candid and critical comments that will assist the institution in making the published report as sound as possible and to ensure that the report meets institutional standards for objectivity, evidence, and responsiveness to the study charge. The review comments and draft manuscript remain confidential to protect the integrity of the deliberative process. We wish to thank the following individuals for their participation in the review process: Gerald Dinneen, the review coordinator; William J. Spencer, SEMATECH; Ruben Mettler, TRW, Inc.; Robert Scott, Economic

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--> Policy Institute; Todd Watkins, Lehigh University; Joel Johnson, Aerospace Industries Association; Kenneth Flamm, the University of Texas at Austin and the Brookings Institution, and; John Mather, the National Academy of Sciences. Although these individuals have provided constructive comments and suggestions, it must be emphasized that responsibility for the final content of this report rests entirely with the STEP Board and the NRC.