SELLING OUR JOBS

EXECUTIVE PRODUCER:

Admiral Gene LaRocque (USN, Ret.), President, Center for Defense Information

HOST:

Admiral John Shanahan (USN, Ret.), Director, Center for Defense Information

DIRECTOR OF RESEARCH:

David T. Johnson

DIRECTOR of TELEVISION:

Mark Sugg

SENIOR PRODUCER & NARRATOR:

Ira Shorr

PRODUCERS:

Glenn Baker

Daniel Sagalyn

Stephen Sapienza

PRINCIPAL ANALYST & SCRIPTWRITER:

Eric Bauer

SEGMENT PRODUCERS:

Stephen Sapienza and Eric Bauer

VIDEO GRAPHICS:

Adam Luther

ORIGINATION:

Washington, D.C.

PROGRAM NO.:

835

INITIAL BROADCAST:

March 2, 1995

CONDITION OF USE: Credit "AMERICA'S DEFENSE MONITOR"

(Center for Defense Information).

Videotapes also available.

SELLING OUR JOBS

features comments from:

GREG BISCHAK

Executive Director, National Commission for Economic Conversion and Disarmament

FRANK CONAHAN

Assistant Comptroller General, General Accounting Office (GAO)

WILLIAM HARTUNG

Author, "And Weapons for All," World Policy Institute

JOEL JOHNSON

Vice President, Aerospace Industries Association

GEORGE KOURPIAS

President, International Machinists and Aerospace Workers

LAURA LUMPE

Arms Sales Monitoring Project, Federation of American Scientists

JOHN RICHARDS

Deputy Under-Secretary of U.S. Commerce Department

SELLING OUR JOBS

NARRATOR: $3.3 billion in tax dollars in foreign aid to subsidize US arms sales. Billions more spent promoting these sales. Secret agreements that transfer thousands of jobs and high technology worth billions out of the United States.

The US is the number one arms dealer in the world. But does all this wheeling and dealing really benefit America? This week "AMERICA'S DEFENSE MONITOR" asks is the US getting rich selling weapons or are we just selling our jobs?

["AMERICA'S DEFENSE MONITOR" program introduction.]

ADM JOHN SHANAHAN (USN, Ret.): I'm Vice Admiral Jack Shanahan, director of the Center for Defense Information.

The United States is the number one arms trader in the world today. Putting aside moral and national security considerations for the time being, does our arms trading make good economic sense? Our program today attempts to shed some light on this little known and darker side of international commerce.

NARRATOR: Agriculture. Textiles. Paper. Steel. Heavy machinery. Manufacturing. For decades these American industries laid a strong foundation for the US economy. In producing and selling products in our country and abroad, these industries provided good jobs for millions of workers, their parents and their grandparents.

In June 1992, aerospace workers demonstrated in front of General Dynamics' Fort Worth plant. We asked George Kourpias, president of the International Association of Machinists and Aerospace workers, what his members were fighting for.

GEORGE KOURPIAS: Well, they were talking about their jobs, their jobs that were about ready to be exported. In that situation, General Dynamics had an agreement with the Korean government in which they were going to assemble and build many of the component parts of the F-16.

Our people, of course, were upset with the fact that, first of all, there was a possibility of losing hundreds of jobs. But also they were asked by General Dynamics at that time to train several hundred Korean workers that were going to come over here, train them so that they could do their jobs in Korea.

NARRATOR: General Dynamics had entered into a secret agreement called an "offset" as part of its deal to sell 120 F-16 fighter planes to South Korea.

William Hartung is director of the Arms Transfer Control Project at the World Policy Institute and author of "And Weapons for All."

WILLIAM HARTUNG: Offsets are sort of a polite way of saying kickbacks. It's, you know, if you scratch my back, I'll scratch yours. So, for example, if we sell fighter planes to South Korea, US companies involved in that deal will say, 'Well, you know, if you spend $3 billion on our planes, we'll make sure that South Korea gets some equivalent amount of business.' And that business can come from building components of the US aircraft. It can come from the US company buying other kinds of equipment from South Korea, making investments in Korean companies, or even helping Korea to market its goods around the world.

NARRATOR: Offsets come in two basis varieties. "Direct offsets" involve transferring military technology and production know-how to other countries. One example is the agreement to transfer a portion of the work on the F-16 to South Korea. "Indirect offsets" are kickbacks not directly connected to military goods. Sometimes consumer goods are imported from nations buying US arms and sold in the US. Other times, US investment dollars are used to create jobs abroad.

Whether it's canned hams from the former Yugoslavia, office furniture from Canada, or sailboats and paper products from Spain, all these imports compete against domestic US products and put US jobs at risk. In one of the most bizarre cases, McDonnell Douglas helped establish a Domino's Pizza franchise in Barcelona as part of a deal to sell the F/A-18 fighter plane to Spain.

The aerospace workers' stand against the F-16 offset program failed to stop General Dynamics from completing their deal with South Korea.

Mr. KOURPIAS: Well, the contract went through. But General Dynamics did not send those Korean workers to the United States to be trained. Supervisors from General Dynamics went over there and trained them.

It was an important rally. We hope it might have been a turning point, but it wasn't.

NARRATOR: Kickbacks. Transferring business to foreign companies. Helping other nations market their products in the US. With all of this, it's ironic that defense contractors promote US foreign arms sales to Congress by pushing the need to keep jobs in the United States. McDonnell Douglas' campaign to sell F-15 fighter planes to Saudi Arabia is a good example.

In November 1991, McDonnell Douglas announces the Saudi Arabia wants 72 F-15s. Videos and promotional literature flood Capitol Hill urging Congress to okay the sale. McDonnell Douglas forms a coalition with other firms and labor unions, buys newspaper ads, organizes rallies and orchestrates 20,000 letters to Congress and the White House. Its 2000 suppliers, spread over 346 congressional districts in 46 states, support McDonnell Douglas' assertion that 40,000 near-term jobs are at stake. And McDonnell Douglas raises the specter of jobs going to Great Britain if the US Government doesn't act. Such a sales blitz is not unusual in the arms trade. It's almost daily practice.

Arms exporters also benefit from a generous foreign aid program from the US Government. This year, the Clinton administration has requested that the Congress appropriate $3.3 billion for the Foreign Military Financing, or FMF Program, to finance US arms exports through grants and low-cost loans to other countries. These tax dollars are a form of foreign aid subsidizing weapons purchases by our allies. While the arms industry trumpets the economic advantages of foreign arms sales, they're only telling half the story.

Mr. HARTUNG: So, I think the industry has done a very good job of kind of associating arms exports with jobs. And I think it's easy for them to that because these are big projects. They're built in large factories, the jobs are very visible. Whereas, the jobs that are being lost through offsets arrangements, through cuts in social programs to fund arms export subsidies may be scattered here and there and they don't have as big a lobby standing up on their behalf.

NARRATOR: What are you getting for that $3.3 billion every year? A lot less than you thought suggests Frank Conahan, the assistant comptroller general of the General Accounting Office.

FRANK CONAHAN: Number one, US laws and regulations do not prohibit offsets with the use of foreign military financing, as might be inferred by a casual reading of both the laws and regulations.

NARRATOR: Back in April 1990, President Bush's policy on offset agreements stated, "US Government funds shall not be used to finance offsets in security assistance transactions except in accordance with currently established policies and procedures." President Clinton accepted this policy and Congress turned it into law in 1992. But this loophole allowed our allies to continue receiving offsets on top of our foreign aid. The US is the only nation which pays other countries to buy our weapons and permits the jobs created by such work to be exported to the buyer instead of remaining in the United States.

Mr. CONAHAN: Secondly, the four countries that we reviewed -- Israel, Egypt, Greece and Turkey -- obtained billions of dollars in offsets, while FMF supports US objectives, offsets do, in fact, reduce employment in the United States. It impacts adversely on the industrial base. The United States loses production, it loses jobs. Offsets create foreign competitors.

NARRATOR: Counting financing and offset agreements, how many times does the US end up paying for these sales?

Mr. CONAHAN: Well, I suppose it depends upon how you count that, but at least twice. I mean, very, very directly twice, yes.

Mr. HARTUNG: Once again, when defense companies say arms exports are lucrative, they're supportive of the US job base, they don't point out the fact that through offsets, while the dollars come in one way, the jobs are exported out the other way through these offset arrangements.

NARRATOR: Joel Johnson, the vice president of the Aerospace Industries Association, articulates the arms industry's point of view at a congressional seminar on conventional arms transfers sponsored by the Center for Defense Information.

JOEL JOHNSON (from CDI conference, 16 November 1994): From an economic aspect, macro level, those exports are like any other exports. For every billion dollars, there's some 15- to 20,000 Americans have a job directly associated with the product and another 10,000 or so have jobs as a result of the so-called multiplier effect -- the banker, the candlestick maker, the real estate agent, etc. Thus, it's safe to say that today about 350- to 400,000 Americans are employed because of arms transfers.

NARRATOR: But other observers feel these figures are exaggerated.

Mr. KOURPIAS: For every one billion dollars in export sales produces around 19,000 jobs.

GREG BISCHAK: General Dynamics was always fairly responsible about estimating the job impacts. And they were talking about three- to 5000 workers being employed, depending on how big the deal was for each billion dollars.

Mr. HARTUNG: So, what you end up having is sort of a net wash. There's some jobs here producing the arms for export, but a cost to that is there's other jobs in other sectors of our economy that are being exported overseas.

NARRATOR: What jobs are being exported? What industries are being hurt?

Mr. JOHNSON: I think offsets probably have a relatively trivial impact on the economy, given the size of our economy. I can think of maybe one or two examples of a US company coming into the political arena and saying, hey, I've been hurt by an offset. Mostly, nobody even knows they go on because they aren't important enough to know.

NARRATOR: Are offsets unimportant or just undisclosed? Because these agreements are usually secret, it's difficult for companies or even the federal government to determine their true effects. But the veil of secrecy has developed a few cracks.

In February 1993, Wisconsin Senator Russell Feingold called for a governmental investigation of a payoff offer by Northrop, a US defense contractor, in a deal that undercut Beloit Corporation, a Wisconsin company that builds paper-making machines. Northrop, in partnership with McDonnell Douglas, agreed to sell the government of Finland 64 F/A-18 Hornet warplanes for $3 billion. As part of the agreement, Northrop promised to help Finnish companies sell their products in the United States.

Specifically, Northrop offered the US International Paper Company $1.5 million to buy a Finnish paper-making machine instead of the American-built version. If International Paper had accepted the payment and Finland won the contract, American workers would have lost the entire value of the contract and the jobs involved.

Mr. HARTUNG: The companies, you know, really have no qualms about making these offset deals because, by and large, they're not the ones that are paying the freight. And, in some cases, as the GAO has pointed out, they can even charge off their administrative costs, their costs for putting together these deals against US Government contracts.

NARRATOR: Northrop declined to be interviewed for this story, but because International Paper publicized Northrop's incentive, Beloit Corporation reduced its final bid, won the contract, and saved US jobs. But the vast majority of such non-defense offset agreements go unreported and undetected by US businesses.

They are even undetected by Congress. Joel Johnson had no comment on the individual Northrop case, but has been very outspoken in opposition to reporting offset agreements.

Mr. JOHNSON (at CDI conference): The worst thing you can do is have the US Government muck around in that field and you'll see offset go up, real offset go up.

NARRATOR: Laura Lumpe, director of the Federation of American Scientists' Project on Conventional Arms Sales, studies arms technology transfers.

LAURA LUMPE: What I think the government should be doing for indirect offsets is promoting transparency and openness in these exports. Industries claiming, routinely now when it wants to make an arms sale, that these sales are good for the economy. I believe that policymakers and the public should be given full information, full disclosure of all the relevant economic information when those decisions are made.

NARRATOR: While defense companies tout the jobs created by arms sales, they haven't complied with congressional requirements to report offset agreements attached to these sales.

Senator Feingold sought to remedy this situation by introducing legislation making incentive payments illegal and requiring real-time notification of all offset agreements to Congress. While the Feingold bill passed Congress last year, its impact is uncertain.

Mr. JOHNSON: I think the first impact, unfortunately, for both industry and Senator Feingold may be well pernicious in terms of what his intentions were, which is to say you may make it more difficult for companies to do some of the kinds of things that looked good on paper, but in fact had really no real impact on offsets.

NARRATOR: The State Department has still not implemented the requirements of the Feingold Amendment. But there's one thing we know for certain about offsets: They're increasing, as John Richards, deputy under-secretary of Commerce, observed.

Secretary JOHN RICHARDS: Several years ago when we first started studying the effects of offsets on the industrial base, we were looking at offset requirements of 30 to 35 percent. The latest I've heard is now they sometimes exceed a 100 percent of the contract value of the sale of the defense article.

Mr. HARTUNG: If US companies are successful in meeting those commitments in a 100 percent offset deal, it means basically all the money and jobs that may come in through the original sale are sent right back out the door through these offset arrangements. Then further down the road, if the foreign country actually gets some production capabilities where they can beat US firms out of contracts, then that further erodes US business and US jobs base for the future.

Mr. JOHNSON: All defense companies, if given a choice, just as all commercial companies, if given a choice, would sell off-the-shelf products for money, punta final, the end of story. But it isn't that simple. When foreign taxpayers spend their money on a foreign product in a highly visible fashion, they tend to want to see something that looks like jobs or technology in addition to the product.

NARRATOR: Industrially advanced countries prefer transfers of US technology and production know-how, so-called direct offsets, to indirect offsets such as incentive payments.

Ms. LUMPE: In many cases, the buying country is initiating the demand for the weapons production technology and the US arms industry is pressuring the US Government to allow the transfer of this technology as well, so that it can make the sale in the short term. It does this even at the risk, of course, of creating its own competition in the not too distant future.

NARRATOR: The United States is currently engaged in transferring production technology for approximately 70 major weapons systems to foreign countries, about the same number as all its NATO allies and the former Soviet Union combined. These agreements have contributed to the emergence of new centers of advanced defense industry and technology -- first in Europe, next in the Western Pacific and, increasingly, in developing nations around the globe.

Ms. LUMPE: We're seeing a lot of this in the Pacific Rim countries right now. I posit that in the not too distant future, five, ten years, those Southeast Asian tigers are going to be a source of very prolific arms production and arms export. As soon as they fulfill their domestic needs, they, too, of course will seek to enter the arms export market, just as US and European industry does.

NARRATOR: The Office of Technology Assessment observed in a 1991 report, "Exports of US military technology can take business away from US companies and jobs from US workers and transfer valuable technology to competitors that may later be used to penetrate civilian markets in the United States."

The effects of technology transfers can be especially serious in high technology industries, such as aerospace and computers. The United States began transferring that technology in the 1950s.

Mr. CONAHAN: During that period, we transferred composites, we transferred guidance, we transferred instrumentation, we transferred avionics, we transferred a whole family of technology. That technology is now being used in both the military as well as the civil side of the Japanese industry in direct competition to ourselves. The same clearly will happen in the case of Korea when we finish with these high-tech co-production programs that we've got going there.

NARRATOR: The web of technology transfers, co-production and other offset agreements became so complex in the sale of

F-16s to South Korea that the GAO was unable to calculate whether the sale would mean more or fewer US jobs.

Ms. LUMPE: In the 1991 F-16 sale to Korea, the net effect was clearly a loss of US jobs, but it's difficult to assess exactly how that balances out because all of the indirect offsets, the ones that involved industry other than the defense industry, so the counter trade, the importation of South Korean products and marketing of those products in the United States, all of that's held very closely as confidential business information and hidden from the public.

NARRATOR: William Hartung, however, sees a greater danger than the immediate loss of jobs.

Mr. HARTUNG: From Korea's point of view, this F-16 co-production program is their springboard into becoming a major player in the fighter plane field. Now whether they can carry that through is hard to say, but I see no reason why the US Government and the Lockheed Corporation should be helping them to achieve that objective.

Mr. JOHNSON: I don't think it's a bad deal for America. I'm not sure it's necessarily a good deal for the Koreans. Which is to say they might have been smarter having bought F-16s off the shelf and put their money into Hyundais and TV sets. But, you know, they're a sovereign government, they can make their own call.

NARRATOR: Other observers, however, have been more concerned about the government's lack of oversight on transferred production technology.

Mr. HARTUNG: The General Accounting Office did one survey. They just looked at 18 programs and they found that in one-third of those there had been unauthorized sales to third parties. When they asked people at the Pentagon and the State Department how could this happen, it ends up it was really nobody's job to keep an eye on that.

They asked the Pentagon and they said, well, we thought the State Department was doing it. They asked the State Department and they said, well, we thought the Pentagon was doing it. And so, it was sort of an Alphonse and Gaston routine, but it was not funny because these are weapons of war that we're talking about.

Secretary RICHARDS: There have been occasions where we've uncovered the transfer of technology to third countries and that has been a -- that situation then results in a much more thorough review when we're dealing with the same country again.

NARRATOR: Does our government encourage defense contractors to transfer technology and co-produce arms with other nations?

Secretary RICHARDS: We would first encourage any company to sell an item off the shelf that's produced in the US with US labor. However, if that is not an option for the company, we will not object to their entering a co-production program as long as that program is in the interest of the United States from a foreign policy and national security standpoint.

NARRATOR: Frank Conahan believes US officials take a more active role.

Mr. CONAHAN: Let's take the cast of Egypt's purchase of the F-16 aircraft. It purchased the F-16 aircraft with foreign military financing. At the United States Government request, Egypt agreed to Turkey's assembling airplanes in Turkey for delivery in Egypt. There, Turkey clearly benefitted from having used its assembly operations for this activity.

This arrangement was made by President Bush when he visited Turkey. And the US contractor, contractors were willing participants in all this. And your tax dollars were used to finance that operation.

Mr. KOURPIAS: That's absolutely crazy. And whoever, whatever politician, whatever bureaucrat in the Department of Defense or State made a decision such as that, they ought to be removed from office.

NARRATOR: Sales such as these are rarely reported, but the result is that US tax dollars are contributing to the transfer of high-paying US jobs to other countries. With all the problems inherent in transferring technology and production know-how, why do companies continue to do it?

Mr. HARTUNG: The companies have been willing to take the risk of selling this production technology overseas on the notion that they'll always sort of stay one step ahead.

Mr. JOHNSON: We don't sell our seed corn. If you take a look at the systems that are being licensed overseas and the parts of the systems that are being produced, what you'll generally find is that's 20-year old technology. We've already got something more recent often in production or at least certainly in the development phase.

NARRATOR: All of this -- the incentive payments, the transfer of technology, the co-producing of weapons with foreign countries -- it all leads to one central question: Do US foreign arms sales create or export US jobs?

Mr. JOHNSON: The government did major studies around 1988, another major one around 1989, if I'm -- I'm not quite sure of the years -- but involving all the agencies of the government. Documents that were 80 pages long or so were published. The bottom line conclusion both times was that offsets simply don't have much of an impact on the economy. Anybody who wants to go read those, they can call the Office of Management and Budget and get them.

NARRATOR: We did get a copy. In its 110 pages, this detailed report studied the job-creation effect of $35 billion in arms sales between 1980 and 1987. Although some critics find fault with the report's methodology, it clearly lays out the industries that gained and lost jobs from the sales.

We might have expected the industries that gained jobs: metal products, electronic equipment, transportation equipment, and instruments. A total of 7800 jobs had been created.

We didn't, however, expect the list of industries which had lost jobs: agriculture, textiles, paper, steel, heavy machinery, manufacturing. These industries lost 7,260 jobs.

All told, with the pluses and minuses, $35 billion in foreign arms sales had created about 540 jobs over the eight-year period. Only 540 jobs. A far cry from the bloated claims of the defense industry. And it didn't seem like much to us, considering the billions of tax dollars spent each year to promote these sales.

Mr. HARTUNG: As it is now, there's $7 billion in government subsidies for weapons exports. There's all kinds of government services that are really designed to help the industry promote arms sales. I think that money should be phased out altogether.

Mr. CONAHAN: Why should your tax dollars be used, first, to provide armaments to a foreign government and then, secondarily, provide that government with economic benefits to the exclusion of economic benefits to ourselves? And I think that that's a crucial question.

ADM SHANAHAN: From what you've seen today, you might well conclude that the economic gain from playing in the arms bazaars around the world is not of significant value to the American worker. At the same time, I respectfully ask you to remember that a friend today can be an enemy tomorrow. We owe our American military forces the assurances that in our defense they will not be killed with weapons made in America.

For "AMERICA'S DEFENSE MONITOR," I am Jack Shanahan.

[End of broadcast.]

CONDITION OF USE: Credit "AMERICA'S DEFENSE MONITOR"

(Center for Defense Information).