Let's Get Some Guidelines For Foreign Defense Sales

Forget Capitol Hill tussles over the B-2 Stealth bomber and the Seawolf submarine. For political fireworks, it's hard to beat the struggle over the future of LTV Corp.'s defense and aerospace division. In April, a federal bankruptcy judge approved a $450 million bid for the LTV business, made jointly by France's Thomson-CSF and investment bank Carlyle Group. Martin Marietta Corp. and Lockheed Corp., whose $385 million offer lost out, have mounted a vigorous campaign to block the deal. Their charge--that if a company 58% owned by the French government gains control of vital missile technology, both national security and U.S. competitiveness will suffer--has won the support of many on Capitol Hill.

An interagency review panel has until July 20 to recommend against the Thomson deal, and the decision will do much to shape the future of the defense industry. Deep military spending cuts around the world are forcing a global consolidation, and contractors are ripe for takeovers and purchases of cast-off units. Yet the nation lacksa well-defined policy for dealing with foreign acquisitions of defense companies. Now is the time to fix that.

NO TEETH. Concern about the erosion of the U.S. industrial base and the loss of vital military secrets has prompted calls for curbs on foreign ownership. But prohibiting all foreign acquisitions of U.S. defense companies could backfire. Military readiness does not demand that Americans own every widget maker that sells to the Pentagon. European companies already own some second-tier U.S. defense companies. Foreign ownership may even be beneficial if it brings new technology or bolsters a financially ailing U.S. company.

The problem is where to draw the line between benign foreign investment and acquisitions that endanger U.S. control of key technologies. In 1988, Congress passed the Exon-Florio Amendment, which authorized the President to block foreign takeovers that could impair national security. The measure empowered the Committee on Foreign Investment in the U.S. (CFIUS), an interagency group headed by the Treasury Dept., to investigate foreign acquisitions of U.S. high-tech firms.

But while CFIUS has a broad mandate, it has no clear criteria for evaluating security risks. What's more, the Bush Administration warmly welcomes foreign investment. As a result, of some 700 foreign takeovers it has examined in nearly four years, CFIUS has extensively reviewed only 13. Bush blocked just one, a Chinese investment in a small aerospace parts maker.

The debate over the LTV unit's future is rekindling congressional ire over CFIUS's track record. If the Administration is smart, it will bolster the panel and broaden and clarify its standards. Otherwise, Congress might take an approach that could thwart even beneficial foreign investments. Removing Treasury's control of CFIUS would be a good start. "Since the Treasury's chief mission is to defray the deficit, it is reluctant to do anything to hurt its ability to attract foreign investment," says Susan J. Tolchin, professor of public administration at George Washington University. The Commerce Dept., which monitors industrial data, should take the lead.

TOO FEW HANDS? A more explicit definition of threats to national security, based on the sensitivity of the technology in question and alternative sources of supply, would give CFIUS some focus. The idea is to adopt rules based on those used in antitrust law to determine whether supply of critical products or technologies would be concentrated in too few hands. If so, the sale would be blocked. "The guiding principle is no concentration in global markets, no threat to national security," says Theodore Moran, a professor of international business at Georgetown University.

Even so, there are undoubtedly a few military goods or technologies that are so sensitive or essential to security that governments will always insist on domestic suppliers. Fighter planes are one example. But it shouldn't be too hard for the Pentagon to draw up a discrete list, culled from its table of critical technologies. This could even take the form of legislation barring the sale of companies producing key technologies. Another factor to consider would be the involvement of a foreign government in a contested bid for a U.S. defense contractor.

Under these criteria, it probably doesn't make sense to allow the LTV sale. The LTV unit is one of the top 20 U.S. defense contractors, with few if any competitors for its advanced missile systems. Yet regardless of how the Administration rules on LTV, it should rethink its decision-making process. Given the sharp contraction of the defense industry, the debate over foreign ownership will only get hotter.

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