The Financial Times
By Demetri Sevastopulo
June 13, 2005

Shifting Political Winds; Demetri Sevastopulo on efforts to promote 'Buy America' legislation

For the past two years Duncan Hunter, chairman of the US House of Representatives armed services committee, has been unsuccessful in his attempts to pass "Buy America" legislation that would restrict the Pentagon from buying defence products from foreign companies.

With shifting political winds this year, however.

Mr Hunter may have more success.

Last month the House approved its version of the 2006 defence bill. Spearheaded by Mr Hunter, the bill would prevent the defence department from making acquisitions from companies that sell certain military products to China. It also includes language that would preclude some foreign companies that receive state subsidies from getting Pentagon deals.

The most expansive provision would preclude the Pentagon from buying any product that contains less than 50 per cent of US content.

Later this year, Congressmen will have to smooth out differences between their bill and the Senate version of the 2006 defence authorisation bill, which is not expected to contain the same acquisition restrictions.

While European and Asian companies are concerned about the Buy America provisions, they have significant allies on the issue, including US defence contractors, the Pentagon, the White House. John Warner and John McCain, the two top Republicans on the Senate armed services committee, are also expected to oppose most of the measures.

"The whole area is bubbling up," says Nancy McLernon of the Organisation for International Investment, a lobbying group that represents US subsidiaries of foreign companies.

"US subsidiaries of foreign companies are getting conflicting signals between recent military contract decisions and some initiatives being introduced on the Hill."

In the face of what appears to be increased protectionism on Capitol Hill, most opponents of the "Buy America" provisions in the defence bill argue that they hurt the US by curtailing the Pentagon's ability to buy the best equipment. Some even argue that the provisions are unpatriotic.

While the provisions are general in nature, some have specific targets in the way they are drafted. The measure preventing the Pentagon from buying goods from companies that receive state aid, so long as the US is engaged in a World Trade Organisation dispute over the aid, could have a huge impact on the European Aeronautic Defence and Space (EADS), the parent company of Airbus.

The US and European Union are embroiled in a WTO spat over Boeing and Airbus, with each side accusing the other of providing subsidies to the aerospace companies.

EADS points out that there is a long way before the House bill becomes law. It also says the provision is not clear, asking whether it would also have an impact on BAE Systems - a 20 per cent Airbus shareholder - which is a very important supplier to the Pentagon.

The White House says it is equally concerned about the China provision, which would prevent the Pentagon from buying goods from companies that sell China products that are included on the US Munitions List (USML).

It says the measure would "cause irreparable damage to department of defence efforts to implement a strategy of worldwide engagement with allies and friendly nations". The move comes as the Congress, supported by the White House, appears to have persuaded the European Union to postpone a decision to lift its embargo on arms sales to China.

But while the Bush administration is concerned about the rise of the Chinese military, it argues that the China provision in the HASC bill is an overly blunt tool that would prevent the administration from refining export controls to "to truly protect critical technologies".

Joel Johnson, vice president for international affairs at the Aerospace Industries Association, a trade organisation representing US defence companies, argues that the China provision is both unenforceable and full of loopholes.

The most expansive provision in the bill - which was sponsored by Don Manzullo, an Illinois Republican in an attempt to protect US jobs and industrial base - would force the Pentagon more strictly to comply with US legislation that requires that the Pentagon ensure that more than 50 per cent of any product is composed of US components.

Most analysts agree that the Manzullo provision would have such a dramatic impact on the Pentagon's ability to acquire weapons and defence equipment that it will almost certainly be eliminated when the House and Senate armed services committees meet in conference.

"Had Duncan Hunter used a stiletto instead of a sledge hammer he would have been harder to fight," says one industry source.