Buy American . . . Or Else

Fallout from the Air Force tanker contract could lead to major changes in federal procurement.

When the Air Force announced in March that it was awarding a $35 billion contract to build a fleet of midair refueling tankers to a team backed by a European consortium, it accomplished the near impossible by unifying congressional Republicans and Democrats behind a common enemy: France.

Not since freedom fries were the special of the day in the House cafeteria has anti-French backlash reached such a fever pitch in the political echo chamber. Sen. Sam Brownback, R-Kan., argued that it's wrong "to require our military personnel to learn to speak French to be able to operate our refueling tanker" while Rep. Norman Dicks, D-Wash., said, "People are outraged that we'd have one of our biggest procurements done by a foreign company."

Behind the political posturing and rhetoric-Kansas and Washington would have benefited from a host of new jobs if losing bidder Boeing Co. had won the competition-legislative machinations are at work to overturn the deal, which was awarded to Northrop Grumman Corp. and EADS, the European parent company of Airbus. The company is headquartered in the Netherlands and has offices in France and Germany.

Rep. Todd Tiahrt, another Kansas Republican, has started an online petition to overturn the contract; 73,570 people signed on in support as of April 17. Meanwhile, Rep. John Murtha, D-Pa., chairman of the House Defense Appropriations Subcommittee, has threatened to stop funding for the program. Boeing also has filed a protest with the Government Accountability Office.

But a decision by Congress to overturn the contract would be virtually unprecedented and could have long-term ramifications for the federal procurement market. Many analysts, for example, fear that offended European nations could reciprocate in kind by blocking future deals with U.S. defense contractors.

"There are a whole bunch of European companies that are just licking their lips; their mouths are practically watering at the prospect that something like this might be reversed, because then they will go to the European Union and say, 'We want to completely change the business,' " says Ronald Kadish, vice president at the consulting firm Booz Allen Hamilton, and a specialist in defense contracting. "The United States sells a lot more than we buy from Europe. And this will give the European Union essentially the opportunity to become a fortress Europe. I am not sure this is what our industry wants."

Members of Congress also are considering changing federal acquisition laws to tilt the balance in favor of U.S. contractors. The 1933 Buy American Act, which mandates preferences for the procurement of domestic products, includes an exemption that requires agencies to view firms from allied countries such as Britain, Germany and France the same as the United States when considering contracts. Domestic job creation cannot be considered part of the bid review process. Northrop officials say the tanker contract will create or support more than 25,000 American jobs while Boeing has projected it would create about 44,000 new jobs.

Rep. Steven Rothman, a New Jersey Democrat, suggested at an Appropriations subcommittee hearing in early March that he would support reevaluating the Buy American Act to remove the exemption for NATO countries. But industry experts insist that revising the country's foremost protectionist policy is a dangerous step that could alienate global trade partners.

"Most members of Congress would fail a quiz about the Buy American Act, and maybe that's a good thing," says Larry Allen, president of the Coalition for Government Procurement, a trade group representing U.S. contractors, including Northrop. "The people who are rattling their sabers are doing so in earnest. But I don't know if it will reach a critical mass."

Cy Phillips, an attorney who specializes in the Buy American Act, says, "To whine about losing American jobs is senseless. We've gone way beyond that. We can put the genie back in the bottle if we choose to. We can withdraw from the international economy if we choose to. But, it strikes me as a little too late . . . and ill-timed, ill- founded and stupid, to be quite blunt."

While Murtha says he doubted there was support for revising the Buy American Act, other, arguably more palatable proposals, are being floated. Rep. Duncan Hunter, R-Calif., ranking member of the House Armed Services Committee, plans to reintroduce a bill, which died in conference last year, to prohibit the Defense Department from entering into contracts with firms that receive foreign subsidies, as appears to be the case with EADS. It is unclear whether the provision could be applied retroactively, says Josh Holly, a Republican spokesman for the committee.

While Congress debates how to provide U.S. contractors with an advantage against their global competitors, little attention has been paid to the underlying issues that may have led to EADS' victory. Dov Zakheim, a former undersecretary and chief financial officer at the Defense Department and now a vice president at Booz Allen Hamilton, argues that relentless consolidation among Pentagon contractors has all but killed competition for major weapons systems.

"You've got fewer and fewer contractors playing in this game and as a result, you essentially have national arsenals that work exclusively for the Defense Department," Zakheim says. "And, with less and less competition, you've essentially forced the government-because it wants to get what it thinks is the best price and the best service-to look outside of the United States. There is nothing inherently wrong with having some international competition. What is a little frightening is to have no alternative but to seek that competition, because you don't have a domestic alternative."

Improving the situation could require building up the country's faltering industrial base. Congress can begin by lowering the barriers for entry into the federal marketplace through decreased regulation and throwing up fewer legislative hurdles, according to Zakheim. "Congress can legislate and react to one particular event, but you are stuck with the legislation once the context changes," he says. "That's just the wrong way to go. And it just avoids dealing with the root cause of the problem which is fundamentally economic and industrial."