Defense Fire Sale Redux

(Washington, D.C.): A few weeks ago, the Center called attention to the proposed sale of a critical part of the U.S. defense industrial base to a foreign firm — and the larger trend, involving the selling-off of America’s national security technology seedcorn, of which this transaction is a prime example. Fortunately, in the intervening period, the bid by a Dutch company, ASM Lithography Holding N.V. (ASML), to buy San Jose-based Silicon Valley Group (SVG) has run into trouble within the executive branch and on Capitol Hill.

Clinton Holdovers Running Roughshod

Yet, entrenched Clinton Administration holdovers and lower-level bureaucrats in the Pentagon, Treasury and other departments are working assiduously to prevent President Bush from making an informed decision to block this defense fire sale. If as a result he fails to do so, he will be making a mistake that will not only have incalculable adverse effects with respect to such sensitive U.S. technological advantages in the area of electronics and optics. Wittingly or not, he will also be establishing a precedent that will be used by proponents of down-sizing and “globalizing” critical defense industrial assets to justify the further liquidation of those U.S. capabilities.

At issue most immediately is the question of whether an interagency organization known as the Committee on Foreign Investment in the United States (CFIUS) will do its job. Pursuant to the 1988 Exon-Florio amendment to the 1950 Defense Production Act, CFIUS is supposed to scrutinize proposed foreign investments in this country to ensure that they are consistent with U.S. national security interests.

Will CFIUS Do Its Job?

The effectiveness of the Committee in performing this mission over the past thirteen years has been greatly circumscribed by the fact that it has been chaired by the Treasury Department, whose responsibility it is to promote foreign investment in America. More surprising has been the support the Defense Department has given in recent years to foreign nationals and companies buying up essential parts of the manufacturing base upon which the armed services must rely.

There have been several arguments for such a course of action:

• The Clinton Administration in particular believed that the United States had excess defense industrial capacity; the ancien regime reasoned that if others will pay to maintain it, so much the better. This ignores the fact that the upshot of these sales is that the American enterprises acquired by foreign concerns not-infrequently wind up being seen as superfluous to the new owners’ core overseas operation and get shut down. This will almost certainly be the case should Silicon Valley Group be sold to the Netherland’s ASML. The latter has made no secret of its desire to eliminate what is today an increasingly formidable competitor — thanks to many tens of millions of U.S. tax dollars invested in enhancing SVG’s ability to bring to market state-of-the art, high-end lithography machines used to mass-produce sophisticated microcircuitry.

  The Persian Gulf War and Kosovo operations underscored the yawning discrepancy between the sophisticated technology used by the American military and that upon which U.S. allies rely. Some contend that foreign investment in the United States defense sector will help facilitate greater commonality in hardware and, thereby, enable greater synergy among coalition partners in combat.

• Should SVG and its subsidiary, Tinsley Laboratories — a manufacturer of advanced optics used in American spy satellites, missile defense and other military applications — be sold off to the Dutch, though, this originated-in-America technology may be available to our allies, but not to us in time of need. Just as it is foolish in the extreme to rely upon overseas suppliers (including the likes of Iraq’s Saddam Hussein, the mullahs of Iran and Hugo Chavez of Venezuela) for the Nation’s oil supplies, it is reckless to assume that those who may disagree with the uses to which we would put our armed forces and/or who simply have full order books would give assured priority in a pinch to meeting the needs of the American military.
• Finally, some believe that the dictates of globalization are such that it is no longer practical, and probably not even possible, for the United States to preserve an indigenous defense industrial base. This is a view not generally shared by our potential adversaries. Even our nominal allies in a unifying Europe seem to be replacing national companies in this sector with consortiums and teaming arrangements that will be better able to vie for contracts worldwide and dominate an increasingly closed-shop European continent.

The Ugly Face of Globalism’

Accordingly, if ASML and its German partner, Carl Zeiss Ltd., are able to make off with SVG/Tinsley’s cutting-edge technology, the ugly face of globalization is likely to present itself: Prime beneficiaries will be Russia, China, Iran and other nations in these European companies’ client roster, nations that will at a minimum find ways to employ such technology to our security disadvantage and may be able — like the Dutch and the Germans — to do so at considerable expense to our microcircuit-dependent economy, as well.

Such concerns prompted Deputy Secretary of Defense Paul Wolfowitz recently to insist that CFIUS conduct an in-depth 45-day investigation into the proposed ASML purchase of Silicon Valley Graphics. If properly performed, it seems very likely that the result would be recommendations from one or more agencies that President Bush object to, and thereby block, this sale.

As things stand now, however — despite considerable agitation from Members of Congress like Senators Trent Lott, Bob Bennett, Jon Kyl and Jim Inhofe and Representatives Robert Stump, Duncan Hunter and John Hostettler — the investigation seems to about to be deep-sixed by the same CFIUS apparatchiks who nearly pushed the deal through, until Secretary Wolfowitz intervened.

The Bottom Line

Too much is riding on the SVG/Tinsley sale — both in its own right and as a precedent for transactions to come — for the President to be denied the benefit of a real and rigorous investigation and the opportunity to decide on the merits whether to allow this American technological seedcorn to go overseas. Will CFIUS do its job, and thus allow Mr. Bush to do his?