Where Industry and Security Intersect
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Since the Cold War, U.S. economic and national security policies have generally existed in separate spheres. Of course, it has long been obvious that U.S. national security ultimately depended on a strong economy, in order to provide the financial and technological support for the world’s best military. Conversely, the U.S. economy equally has depended on the United States’ ability to project military power, in order to preserve the conditions on which growth depends, such as freedom from attack and secure trade routes. But it was generally possible for policy-makers to make decisions separately without needing to integrate the two areas of policy. And this is largely how U.S. policies have been made, with economic policy-makers making decisions on trade and investment issues, and national security policy-makers making decisions on security matters. The two spheres did not often intersect. And even when they did intersect, there was a fairly clear understanding as to which one had the dominant role.
For instance, the United States applied export controls on items destined for the former Soviet bloc based on security concerns and with little weight to economic analysis of the controls. This approach was made possible because of the leading economic position of the United States and the unusual degree of international consensus regarding the need to oppose the Soviet Union. Because the restrictions did not severely disadvantage U.S. industry and were multilateral, there was little need to give great weight to economic perspectives regarding the medium to long-term impact of the controls on U.S. industry and whether controls would be effective in achieving their security goals. Conversely, in the area of foreign investment regulation and trade policy, the key priority was to ensure an open global system of trade and investment, with little interference from a national security perspective.
My argument today is that this traditional separation between the worlds of foreign economic and national security policy no longer exists. There are many reasons, but let me highlight three major trends, and then apply them to some specific current issues. First, globalization. Before globalization of production, high technology products were only produced in a small number of countries, generally close allies of the United States. But now, because of globalization, most sensitive items are available from multiple sources. Our defense industrial base therefore faces greater competition. And export restrictions are less effective in protecting our national security if sensitive commodities are readily available from countries who do not share our security concerns. Therefore, we now conduct more extensive economic analysis in order to determine the correct export control policy.
Moreover, foreign investment in the United States used to originate almost entirely from our close allies in Western Europe, as well as Japan, Australia and South Korea. But globalization has led to incredible economic growth in some parts of the developing world – so that we now see certain developing countries seeking to invest in strategic U.S. assets. Therefore, we now consider significant new security issues in our foreign investment reviews.
Second, during the Cold War there was an exceptional degree of international consensus regarding foreign policy. Today the degree of consensus has diminished, given the increased complexity of the international system. There is agreement on key objectives, such as the encouragement of China to become a constructive stakeholder in the international system or the need to prevent Iran’s development of nuclear weapons. But because there is a variety of tactical strategies to achieve these objectives, it is more difficult today to build consensus. We therefore need to ensure that our policies take into account the extent of international support.
A third change is from the impact of September 11th and the ongoing terrorist threat. Before September 11th, national security policy focused less on potential threats to our telecommunications, energy and financial infrastructure. But now national security has an essential “homeland security” element. So national security now takes into account critical infrastructure issues that were previously the domain of economic policy-makers.
Thus, Washington decision-makers increasingly are confronted by important policy decisions that require them to understand and respond to the connections between national security and economic policy. These connections work in both directions: foreign economic policy must increasingly take into account security concerns, and national security policy must increasingly take into account the economic climate that determines the real-world impact of decisions. Policies that are intended to protect U.S. security may not achieve their goal if they do not fully take into account the changing global conditions. Instead, such policies may actually undermine our national security.
I’d like to elaborate on this theme by talking about four specific issues: the defense industrial base, export controls, foreign investment in the United States, and bilateral free trade agreements.
Defense Industrial Base
Regarding the defense industrial base: as the foremost exponent of free-market capitalism, the United States has long had a philosophical aversion to government policies intended to assist specific industries. Since World War II, as the world’s most competitive economy, the United States has generally had the luxury of honoring its ideological predisposition, as it rarely occurred that a key strategic industry was threatened by foreign competition. There have been examples of government intervention – such as the Chrysler bailout and the steel loan guarantee program. Yet these examples of intervention were not justified by national security so much as by domestic politics and economics – notably the potential loss of jobs in the automobile or steel industries. On the whole, policy-makers have not had to intervene to ensure the prosperity of particular industries that are important to our national security.
Two things are happening that may change this. First, as I mentioned earlier, there has been a rapid rise of foreign competition due to accelerated globalization. A recent Heritage Foundation study on the defense industrial base in the age of globalization noted that there are many foreign suppliers for the Joint Strike Fighter, a foreign supplier has been selected to build the President’s helicopter fleet and the Army and Marine Corps lease Australian catamarans.
Defense Department policies have reinforced the impact of globalization. Specifically, the Defense Department now emphasizes procuring from the best-quality, best value supplier, which in many cases may be a foreign supplier. Moreover, rather than demanding items that are designed for military missions, the Defense Department now procures many commercial items, further increasing the ability of foreign suppliers to compete. The Defense Department policies make sense as a way to obtain the top quality products and save taxpayer dollars. Yet the policies place pressure on U.S. suppliers in the defense industrial base who no longer have a guaranteed customer. Due to these and other factors, various parts of the U.S. defense industrial base may lose the financial resources to maintain their investments in leading-edge technology.
The Heritage Foundation study concluded that we should not be overly concerned about foreign sourcing, and instead “should focus on critical technologies, industries, and skills that are not readily available in the global market.” There is an important insight here, that it is not economically viable to ensure that all strategic technologies are “made in the USA,” and indeed that there are security benefits from global competition. There are great benefits from globalized procurement. But neither should we overlook the potential security impact of critical items being made abroad. U.S. industry is subject to U.S. rules, while foreign industry may not be. For instance, the U.S. government can mandate U.S. industry to give priority to defense procurements. The same authority may not exist for foreign suppliers. So we ought to carefully analyze developments in the defense industrial base, to be sure we understand their consequences and determine whether any policy initiatives are appropriate.
Currently, the U.S. government does not identify or analyze all critical industries. Rather, the government evaluates specific industries on request, often from the Armed Services. Under the Defense Production Act, the Commerce Department analyzes various defense-related sectors. We use surveys to obtain industry data and make policy recommendations. Several years ago, Commerce studied several critical industries such as artificial intelligence, superconductivity, optoelectronics, advanced ceramics, and advanced composites. However, this work was cut back due to concerns that the government should not engage in industrial policy.
It is time to revisit this issue, albeit with caution about the appropriate role of government in the economy. The government should identify industries that are critical to U.S. national security, and assess whether those industries are in good economic condition. For instance, if an item is sufficiently critical that we impose controls on its export, then we should be well-informed regarding trends in the U.S. industry. We could also identify industries that supply inputs that are fundamental to the normal functioning of the U.S. economy and are not easily sourced from abroad. As an example, after Hurricane Katrina, we learned that liquid hydrogen production had been affected and that the resulting shortfalls could have a cascading effect throughout the economy, in the steel and semiconductor industries among others. The Federal government acted quickly to mitigate the impact on the economy.
If a strategic domestic industry is at risk, there could be various policy responses. As an example, the Defense Science Board recently concluded that semiconductor technology and manufacturing leadership is a national priority that must be maintained if the U.S. military is to continue to lead in applying electronics to support the warfighter. The Board provided several thoughtful recommendations for actions to strengthen the domestic industry production of high-performance semiconductors. These recommendations ranged from improved Defense Department acquisition planning, to stronger multilateral implementation of existing export controls on exports to potential adversaries.
Some have suggested that we ought to impose export controls specifically in order to preserve our defense industrial base. In other words, that we should deny exports of sensitive equipment – even where we would otherwise allow them from a national security standpoint – in order to slow down the growth of a competing industry that could outdo our own industry. However, we normally should not use export controls for industrial policy purposes. For one thing, export earnings may be necessary for the financial strength of the upstream industry. That is, while we might be concerned about competition from China’s growing semiconductor industry, cutting off U.S. exports of semiconductor equipment to legitimate civil end-users in China may handicap our semiconductor equipment industry and cost us our technology edge. And another, more fundamental problem is that U.S. policy should not set a bad example for other countries. If we use export controls for industrial policy, so will others. The result will be a spiral of trade restrictions. Thus, while there may be a role for such controls in unusual cases, the standard should be a very high one.
As another trade policy initiative to preserve our defense industrial base, some advocate greater use of defense procurement preferences. The “Buy America” laws and other procurement rules reserve certain procurements for American suppliers, but they place only about 30 percent of defense procurements off limits to foreign firms. The Bush Administration has properly resisted efforts to expand these laws, which would distort the market and hamper our national security by not allowing the purchase of the highest-quality and lowest-cost supplies.
However, the counterpart to this strategy should be to encourage other countries to cut back on their own defense trade practices that mandate technology and production “offsets” as a condition of purchase. These offsets are not just bad public policy, but over time they erode the U.S. defense industrial base that we need for future technological innovations and secure supplies. The Administration has formed a senior-level task force, led by the Defense Department, that has already initiated discussions with other countries about offset policies.
In fact, we should more generally resist foreign defense procurement policies that hamper market access for U.S. firms. Fair access to foreign defense procurements is essential in order for U.S. industry to prosper by spreading their R&D and production costs over a larger base, and to reduce procurement costs for the American taxpayer. So Commerce is surveying U.S. defense firms about any concerns that they have about transparency and fairness in foreign defense markets. Market access may seem like an “economic” concern, but it is important for security reasons as well.
Export Controls
I’d now like to talk about the intersection of trade and security perspectives with regard to export control policy. As I mentioned earlier, during the Cold War era, U.S. export control policy was largely determined by security concerns, without regard to economic impact. Extensive licensing requirements applied to exports in order to ensure that commodities and technology would not be diverted to the Soviet Bloc. This approach worked when the West had a virtual monopoly on most advanced dual-use technologies and when there was a broad international consensus to consider the Communist countries as a monolithic and direct threat to Western collective security.
In today’s world, in order to achieve our national security objectives, we must take into account the economic effect of our export control decisions. Today’s geopolitical and economic situation is far more complex. As I argued earlier, the United States and its partners do not have a monopoly on many of the commodities they control, so the items they deny may be obtained from other sources. And, while there is a high degree of consensus with our allies on core objectives, the complexity of the tasks makes it difficult to achieve unanimous agreement on strategies.
In the export control area, this difficulty has led to countries taking different approaches to their multilateral commitments. Disparate implementation undermines the effectiveness of controls by allowing proliferators to shop for the weakest link, and generally puts U.S. industry at a disadvantage. To respond to these challenges, it is important to harmonize implementation of multilateral controls so that our partners do not impose less stringent requirements on industry than we do. This harmonization requires greater strategic consensus. As one initiative to seek this consensus, the Administration has launched a strategic dialogue with the European Union regarding China, which is led by the State Department.
Conversely, we also need to ensure that U.S. licensing requirements are not so onerous that we virtually compel critical U.S. industries to move offshore. We want to encourage foreign manufacturers to purchase U.S. parts and components, not to design them out of their products because our licensing requirements do not track with those of our regime partners. The night vision industry is a current example: we need to adapt our policies to streamline sales to Western Europe and Japan, since these products are readily available from domestic suppliers in those countries. If we do not take this into account, we will end up controlling exports that no longer exist. Paradoxically, stronger controls may weaken our national security by reducing our influence over the market.
One especially important area of export control policy involves our rules on technology transfers to foreign nationals with the United States. Without such rules, foreign nationals would be able to access and repatriate sensitive U.S. technology to potentially hostile military programs. Moreover, we face a particular threat today from terrorist groups, who may be operating within our own borders. At the same time, foreign nationals play a vital role in promoting the development of advanced technology within the United States. Many of the top researchers at our universities, government labs, and private industry are foreign nationals. On first impression, this issue appears to involve a “trade-off”, balancing our national security interests against our economic policy interests. But given the critical role of foreign nationals in the U.S. research system, attracting foreign nationals is itself very important to our technology edge and therefore to our national security. So the right analysis of this issue requires policymakers not to leap for the superficially attractive solution of severely restricting foreign nationals’ participation in U.S. research. Rather, we should strive to focus our controls on protecting the technology that matters most, and avoid imposing undue restrictions that will undermine our ability to attract the best and the brightest to our shores.
Foreign Investment in the United States
Foreign investments in the United States can raise significant national security concerns. U.S. policy toward foreign investment has been much in the news lately, in the wake of IBM’s successful sale of its personal computer business to a Chinese company, Lenovo, and the unsuccessful attempt by China’s National Offshore Oil Company (CNOOC) to acquire a U.S. oil company, Unocal.
The U.S. Government evaluates these national security concerns through the interagency Committee on Foreign Investment in the United States (CFIUS), which is chaired by the Treasury Department. As Treasury recently stated in response to a draft Government Accountability Office (GAO) report, CFIUS takes a broad range of factors into account when it evaluates national security. These factors include the acquisition’s impact on the defense industrial base, the potential for transfer of sensitive technology, and foreign control of critical U.S. infrastructure. All CFIUS member agencies participate in the Committee’s decisions and work as a team to determine whether an investment threatens the national security. If there are concerns, the agencies work together to develop measures to mitigate the threat or recommend that the President block the transaction if mitigation is not practical.
It is critical for the success of this process that all agencies recognize the different aspects of national security. It is important to our national security not to allow foreign investments that pose a high risk that classified or sensitive technologies will be obtained by our strategic rivals or even by terrorist groups. It is important not to allow foreign investments that could allow strategic rivals or terrorists to disrupt our critical telecommunications, financial or energy infrastructures. But it is also important to our long-term national security that our actions not deter foreign investment in the United States. Foreign investment creates jobs and tax revenue in states across the country, not to mention increasing the valuation of U.S. companies. And it is equally important that we not send a signal to other countries that they should follow our lead and adopt restrictive policies toward foreign investment. Such policies would slow global growth and hamper U.S. exports, ultimately reducing U.S. strength.
This is hard work, requiring us to gather the relevant facts, analyze them carefully, and listen closely to the arguments that agencies present based on their differing expertise. As I argued earlier, a reflexive “pro-security” position may end up damaging our security in the long run, if it is not founded on a careful analysis of the security risks and the economic impact of government action.
Because of the importance of case-by-case analysis in foreign investment reviews, the role of Congress in individual reviews deserves careful consideration. There was quick and adverse Congressional reaction to the proposed Unocal transaction, and the transaction did not go forward. Whatever the merits of this policy reaction, the process was not ideal. In the Unocal case, there was no factual investigation and analytic review of whether CNOOC’s acquisition posed a threat to U.S. national security, and if so, whether the threat could be mitigated.
Nonetheless, there is now proposed legislation to institutionalize Congress’ involvement in the review of specific investments. One pending proposal would require that the results of an investigation be reported to the Senate Banking Committee and the House Financial Services Committee. This proposal would require Treasury to submit quarterly reports to these committees with a detailed analysis of each transaction that was reviewed the previous quarter or is being reviewed. Moreover, it would set up a process for Congress to disapprove a transaction that had already been cleared by CFIUS, and to block transactions if the President chooses not to do so after a CFIUS review.
In brief, the proposal would involve Congress in case-by-case decision-making regarding individual foreign investments in the U.S. economy. While the Administration welcomes Congressional oversight, Congress’ role is to establish and evaluate the legislative framework that guides agency decision-making on specific cases. Due to the inherent nature of the two bodies, the Executive Branch is in a better position to find facts and evaluate individual cases.
The Congressional interest in foreign investment reviews is best addressed by enhancing the transparency of CFIUS. Because of concerns about business confidential information and chilling the foreign investment climate, CFIUS has been reluctant to brief Congress extensively regarding its decision process and the actions it takes to mitigate potential threats to national security. This has led some in Congress to ask whether CFIUS adequately protects U.S. security interests. However, Treasury and other CFIUS agencies are willing, on request, to brief Congressional committees with jurisdiction over CFIUS regarding completed reviews. To ensure confidentiality, these briefings are done in closed session and, if appropriate, at a classified level. This is a good way to enhance transparency for the Congress and increase confidence in our national security reviews.
Free Trade Agreements
Another area where security and trade intersect involves free trade agreements, or FTAs. FTAs are not merely economic agreements. They have an important national security and foreign policy dimension, as they provide a high-profile symbol of the mutual commitment between the United States and the country involved. They also increase economic opportunities for export-oriented firms and workers, and thereby serve to reinforce constituencies within those countries that are market-oriented and pro-Western. The 2002 National Security Strategy recognized the importance of free trade to U.S. national security, because economic growth promotes political reform.
The Bush Administration recognized the political dimension of FTAs. This was a central reason why the Administration placed high priority on negotiating FTAs with countries in the Middle East. Given the national security and foreign policy importance of that region, it is vitally important to increase economic opportunity for the citizens of pro-Western regimes and to provide a tangible demonstration that the United States will support moderate Islamic states.
More recently, U.S. national security provided an important argument for the Central American Free Trade Agreement (CAFTA) with Costa Rica, El Salvador, Honduras, Guatemala, Nicaragua, and the Dominican Republic. As senior Administration officials advocated for Congressional passage of the FTA implementing legislation, we stressed the importance of supporting pro-Western leaders in the region. We warned that a failure to pass CAFTA could contribute to the political decline of these leaders and a return of leftist, anti-American leaders such as Daniel Ortega in Nicaragua.
For the future, the Administration is considering FTA negotiations with countries such as South Korea and Egypt, among others. Such negotiations, apart from their economic benefits, would have significant security advantages.
Yet it is not enough to negotiate FTAs with politically significant countries. We should go further, and seek to integrate security concerns into our discussions with potential FTA partners. To be clear, this is not to argue that FTAs should themselves address the various political and military issues that exist between the United States and the country concerned. But a stable trade relationship depends upon trade occurring under conditions of safety, and it is reasonable to expect sufficient safeguards to be established along with negotiations for the expansion of trade.
For instance, the United States has been seeking the adoption of strong export control systems in FTA partners. The United States raised the issue of export controls during the negotiation of the FTA with Singapore, and Singapore proceeded to adopt a strong export control law. Similarly, the United States has discussed the importance of export controls in connection with its FTA negotiations with Panama.
Without such systems, expanded U.S. high-technology exports to FTA partners may end up being diverted to third countries which pose proliferation or security concerns. This is especially important in the Middle East and Asia, given the security conditions in those regions. In advocating for stronger controls, the United States is fulfilling the intent of United Nations Security Council Resolution 1540 – passed as a result of President Bush’s leadership – which calls on all member states to strengthen national export controls relating to weapons of mass destruction. The U.S. initiatives reflect the reality that good security is a precondition for expanding trade.
Conclusion
To sum up, across many of today’s front-page issues, we see that national security and economic policy are interwoven. Successful U.S. policy-making, on the issues of today and the future, will require us to maintain and expand the Administration’s commitment to the integration of national security and economic policy perspectives. I see this every day, due to my dual responsibility for trade policy and security policy. If we do not achieve this integration, the United States risks making national security decisions without fully considering their economic consequences, and setting economic policy that does not fully consider U.S. national security objectives.