The Globalization of the Defense Sector? Naval Industrial Cases and Issues

Peter Dombrowski

Numerous authors have noted the importance of globalization for national security affairs, yet globalization remains a highly contested concept. Political scientists, economists, and historians have all sought to pin down the nature of globalization with little success. Many argue that whatever the historical antecedents of globalization, the current period represents a new watershed in international economic relations. As Robert Gilpin explains, proponents of the globalization thesis claim that “a quantum change in human affairs has taken place as the flow of large quantities of trade, investment and technologies across national borders has expanded from a trickle to a flood.”¹ The financial services sector, biotechnologies, information services, and a host of other industries show increasing evidence that globalization is occurring or has occurred over the past 20 years.

The same cannot be said for the defense industrial sector. Although recent studies have pronounced that defense sector globalization presents a major challenge to U.S. national security, the evidence is more anecdotal than overwhelming.² Arguments tend toward prescription—advocating that officials facilitate globalization³ or that they take steps to halt globalization’s progress—or explaining, in theory, what globalization will mean for defense policy and military affairs.⁴ In each case, globalization of the defense sector is taken as a given.⁵ Yet, as Judith Reppy has argued, discussions of defense industrial globalization are “still largely prospective.”⁶

This chapter explores the issue of defense sector globalization with particular attention to those industries producing naval weapon systems. First, it analyzes the relationship between economic globalization and the cross-border activities of defense firms. Second, it discusses the current state of the transnational defense industry. Third, it offers three alternative perspectives on the globalization thesis—Americanization, internationalization, and regionalization/regionalism—and concludes that the defense sector is actually experiencing a moderate amount of regionalism. Finally, it examines an aspect of defense industry globalization that is most specific to the U.S. Navy—shipbuilding.

The (Il)Logic of Defense Industrial Globalization

In many respects, the logic underlying the overall process of economic globalization does not support its application to the defense industrial sector. Economic globalization is motivated by market logic. Firms seek profits wherever they might find them, at home or abroad. States acquiesce to and/or encourage globalization because private markets stimulate economic growth and increase national wealth. Anything that impedes open markets reduces opportunities for growth. In sectors where globalization has progressed the farthest—finance, for example—the last three decades have witnessed a gradual reduction of state controls over cross-border economic activity.

By contrast, defense industries are almost entirely creatures of states. States are the primary consumers of defense products, especially modern, high-technology weapon systems. Without government procurement defense industries would not survive. Recognizing this, states either own defense firms in toto, are significant shareholders in defense firms, or provide a range of subsidies and incentives to firms undertaking defense production. Defense firms find it difficult to survive as independent, stand-alone companies or as divisions within mixed commercial-defense enterprises. Historically, states have constrained the ability of defense industries to operate across national borders through a variety of mechanisms including export control laws.

Despite this, many analysts believe that the logic driving economic globalization applies to defense industries—for both theoretical and empirical reasons. On the theoretical side, it is argued that in a liberal world economy, no economic phenomena—much less an entire industry—is immune from the effects of globalization. The pressure to seek new markets, cut costs, and share technology pushes firms to globalization even if they are primarily engaged in producing weapon systems.⁷ Globalization is facilitated by information-age technology systems that make it increasingly difficult for countries or firms to pursue independent, much less autarkic, economic policies in any industry. To resists the trend of globalization is to ensure technological backwardness, rising prices, and reduced productivity. By this reasoning, a country that does not allow its firms to expand internationally is doomed to lose future arms races to more open, nimbler competitors. “Thus in the name of self-sufficiency and security of supply, countries have long protected their defense industries against foreign competition whenever possible, even when the result is higher costs or less advanced equipment.”⁸

Empirically, changes clearly are afoot in the world’s defense industry. According to Ann Markusen, “Arms manufacturers are following the lead of their commercial counterparts and going global, pursuing transnational mergers and alliances and establishing design, production, and market operations abroad.”⁹ By Markusen’s account, even the most potent symbols of American military superiority, such as the F–16, are filled with components produced abroad.¹⁰ Although the producer of record might be an American-based firm such as Boeing, the various subcontractors and vendors assembled by Boeing to help manufacture the jet fighter often produce or buy components overseas.¹¹

But in actuality, defense industrial globalization is more of a mirage than a reality. Across all three principal dimensions of economic globalization—trade, investment, and technology diffusion—there are reasons to doubt that the defense sector will follow other sectors such as the automobile or electronics industries, much less service industries such as banking, finance and transportation, on the road toward globalization.

Serious impediments remain to higher levels of cross-border defense related trade, investment, and technology flows. First, economic and political impediments to defense exports—from limited demand to concerns about regional instability and proliferation—continue to restrict trade in defense products and services. No matter how much the defense industry would like a freer hand to peddle its wares overseas, there are legitimate concerns from the national security perspectives of individual states. Second, cross-border investments, with some significant exceptions, often generate security concerns in host-nation governments—including, and perhaps especially, in the United States. Even if we accept declinist arguments about the future of the nation-state, most governments continue to believe that maintaining control over basic weapon production facilities is prudent. Third, advanced military-specific technologies in the United States and elsewhere are largely the product of public investment; few governments want to share the public patrimony with close allies much less with countries that qualify merely as potential allies or friends. Even dual-use technologies are subject to this logic, as indicated by the 2001 imbroglio over the sale of an American firm, Silicon Valley Group, Inc., to the Dutch firm of ASM Lithography Holding NV. As news accounts report, the United States is “concerned that SVG’s lithography technology—used to make lenses for spy satellites and other high-tech equipment—will be shared by the Dutch firm with potentially hostile countries such as China.”¹²

In sum, then, there are logical reasons to suspect that the alleged globalization of defense industries is either not as extensive as some analysts assume or is taking a different shape than the globalization processes under way in other industries.

Alternatives to Defense Industry Globalization?

If globalization seems implausible, the question then remains: What are we to make of the observable changes in the world defense industrial sector? Significant changes in the ways in which defense firms operate are clearly afoot. Moreover, if the advocates of defense sector globalization, both from industry and from inside various national governments, have their way, remaining impediments to cross-border defense trade, investment, and technological diffusion will soon be removed. Firms will then be freer to pursue global strategies based in firm-level strategies. What then?

Americanization. One answer is that, to date, the world has witnessed the Americanization of the defense sector.¹³ By such logic it will see more of the same over the next decade as the United States increases defense spending in response to the war on terror and the DOD desire to achieve the “military after next.” The U.S. defense market—in terms of research and development (R&D) and procurement spending—remains by far the world’s largest. Given the size of the U.S. defense budget, foreign firms are at least as likely to seek to enter the U.S. market as American firms are to seek access to overseas markets. Companies such as BAE Systems and Rolls Royce may now be trying to do just that with their acquisition of smaller U.S. firms. Some analysts even predict that a European firm such as BAE may soon try to purchase or merge with an American prime contractor. Political opposition to such maneuvers can be expected, however, with some charging that foreign acquisitions “eat the technological seed corn” upon which American military superiority is based.¹⁴

Americanization is driven by more than the simple size of American defense budgets, however. It also reflects the dominance of American arms in the international marketplace. Since the end of the Cold War, the United States has increased its lead over competitors as the largest exporter of arms and other military equipment. Even as Russia, France, and other countries seek to promote arms sales by their own national champions, there is little reason to believe that they will supplant the United States as the leading arms supplier any time soon. The United States uses foreign military sales as a key component of its national security strategy; other governments buy American, at least in part, for the purpose of remaining interoperable with U.S. forces. American weapon systems, although relatively expensive, remain among the most sophisticated and prestigious in the world.

Internationalization. A second possibility is internationalization. Although this term is sometimes used as a synonym for globalization, it implies a state-to-state dynamic rather than the borderless, private-sector-dominated dynamic associated with most versions of globalization. Given, as we shall see, the importance of state decisionmaking in promoting the cross-border activities of defense firms, internationalization is an appealing alternative explanation to the globalization thesis. Yet it remains inadequate because it implies that the process spreads evenly across the entire world economy and system of states. Nothing could be further from the truth. Increased cross-border relationships among defense industrial concerns are geographically limited. They do not extend to huge swathes of the globe—from South America to Africa, for example. Even those regions that have historically participated in defense industrial production are today less active in the international arms market. East Europe and the former Soviet republics have been reduced to niche players with few pretensions to competing at the same level as their North American and West European counterparts.¹⁵ Russia, although it has enjoyed a resurgence in arms sales over the past 2 or 3 years, sells largely to former client states or to countries that remain outside of the U.S. orbit by choice (India and China, for example) or because of imposed sanctions.¹⁶

Regionalism/Regionalization. The other main contender is the concept of regionalism. Sophisticated treatments of regionalism stress the need to distinguish “between regionalization, which refers to the regional concentration of economic flows, and regionalism...a political process characterized by economic policy cooperation and coordination among countries.”¹⁷ One way to look at this issue is to see that market processes drive regionalism, and that individual firms cross national borders in pursuit of markets, market share, and profits. Regionalization, like internationalization, is driven by the calculations of government and officials. By removing impediments to trade and investment in the defense sector, governments encourage defense firms to do business with key allies or cooperate with firms home-based in the territory of friends and allies. More actively, governments may even offer various incentives for firms to collaborate with foreign competitors and to sell arms to key allies.

In some respects, regionalism is not incompatible with globalization because, however defined, globalization is an uneven process. Not all countries in all regions are, or will be, fully integrated into the international arms market. A number of states critical to global and regional security remain largely outside the global marketplace in general, much less the market for arms sold by American and European firms. Thus, China, Iraq, Russia, and North Korea, to name the most prominent examples, are not full participants in cross-border arms sales or investment except—sometimes—among themselves. When they do take part in cross-border transactions, it is largely to purchase advanced technologies abroad that they cannot develop indigenously or to avoid arms control regimes or United Nations-imposed sanctions.

Others, like the former communist countries of Central and Eastern Europe and most of the former Soviet republics, have decreased their participation in international defense markets. Several Central and Eastern European countries have decided to concentrate development efforts in other economic areas and to buy much of the equipment needed to modernize their forces from the West. If they hope to achieve membership in Western security institutions such as the North Atlantic Treaty Organization (NATO) and achieve reasonable levels of interoperability, they cannot remain autarkic in arms production. For the most part, globalization for such regions will consist largely of imports and limited licensing agreements to produce lower-end systems and components. The potential for globalization is also limited by the fiscal constraints under which these countries operate.

Most regions participate in globalization largely as niche and regional players. With the exception of some commercial off-the-shelf components and subsystems that are included in major weapon systems, few expect that these left-behind areas will ever participate in the “globalization of defense industries” with regard to first-generation weapon systems. Even European firms often occupy niches far from the cutting edge. German, Dutch, and Italian expertise in designing diesel submarines, while impressive, hardly represents the apex of undersea technologies (see chapter 17). Often niche players emerge because their own strategic needs have forced them to invest in areas that eventually become desirable to the wider international community. Israel, for example, has played a significant role in developing unmanned aerial vehicles (UAVs) because of its need for tactical and operational intelligence and the paucity of national space-based intelligence, surveillance, and reconnaissance capabilities.

The most significant arena of defense industrial regionalism lies within the North Atlantic community. Like the United States, Europe experienced a wave of mergers and acquisitions in the 1990s, albeit somewhat later than the American process. To date, the result has been a more regionalized European defense industry.

The European Union has sought to rationalize procurement strategies by allowing for the consolidation of national champions into supranational regional champions. Thus EADS, BAE Systems, Thales, and Finmeccanica have emerged as the “big four” producers of defense equipment within the continent. To some extent, each of these firms is multinational—R&D and production facilities are spread across multiple European countries and, to a lesser extent, non-European countries such as the United States. It should be noted that, as in the United States, formal firm-level identification actually overstates the level of diversity within the European defense industry. Europe’s big four actually collaborate and cooperate as often as they compete; Alberto Lina, the chief operating officer of Finmeccanica, estimates that nearly 45 percent of the total revenues of the big four result from civil and military joint ventures.¹⁸ They are increasingly entangled in a complex web of partnerships, licensing agreements, joint ventures, and other forms of collaboration.¹⁹ One consequence of these European mergers is that the largest firms, EADS and BAE Systems, are now large enough that they may be able to compete with the largest U.S. defense firms in certain areas of the defense market.²⁰

According to Mattias Axelson, “each [EADS, BAE Systems, and Thales] has the sales and breadth of capabilities that are comparable to the leading U.S. defense companies and each is based on a complex network of cross-border ownership and joint ventures.”²¹ EADS has gone on record as saying that it will pursue American business, in direct competition with the major American firms, in an aggressive fashion. EADS co-chief executive officers Phillipe Camus and Rainer Hertrich argue that their firm can increase competition in the American market, solve interoperability problems within NATO, and reduce costs on both sides of the Atlantic by pooling development and production.²² Moreover, EADS and the other European defense firms even enjoy some competitive advantages over their American rivals: less restrictive export regulations and lower levels of corporate debt, for example.

For these reasons, it has been predicted that the next logical step is a creation of a more tightly integrated trans-Atlantic defense industrial base.²³ But there is a paradox. Officially, NATO allies remain committed to meeting interoperability problems and equipment shortfalls with a strategy centered on the Defense Capabilities Initiative (DCI). But unofficially—and at the level of domestic and regional politics—what NATO countries view themselves as committed to is much less clear. As Alexander Moens observes, “European governments buy relatively little from other European defense industries...the ‘new’ European giants would not really compete with U.S. giants in the key European defence markets but with previous national citadels.”²⁴

Most Western European governments aggressively seek to secure a share of the overall procurement, capture R&D expenditures, and sustain those remaining national champions. Moreover, the fact remains that both at the individual country level and in the aggregate, defense procurement and R&D spending in Europe remains relatively small compared to U.S. spending.

Naval Implications of Defense Industry Regionalism

The U.S. Navy is affected by general developments in the overall defense industrial sector. As such, globalization or the other potential trends such as regionalism will affect Navy acquisition programs across the board. However, the remainder of this chapter will focus on the one component of the defense industrial base that is Navy unique: shipbuilding. As will be argued, this most Navy-specific area of the defense industrial sector is even less susceptible to globalization or regionalism than the other defense sectors.

Across the globe, naval shipbuilding represents one of the most protected segments of the defense marketplace and one of the least globalized industries. The United States is not an exception to this generalization; if anything, it may represent an extreme example. However, before considering the possible effects of globalization on naval construction in the United States, it is important to understand the general relationship between warship construction and commercial shipbuilding within the United States, as well as the contrast between the U.S. shipbuilding industry in general and shipbuilding in other parts of the world.

Commercial market share. Commercial shipbuilding in the United States remains uncompetitive in global markets. As of June 2000, the United States controlled just 1 percent of the world’s market for newly constructed commercial vessels over 1,000 gross tons, a figure that ranks the United States tenth in the world behind South Korea and Japan, among others. Overall, less than 2 percent of the American shipbuilding revenue comes from exports. Many factors account for the American shipbuilding industry’s position in world markets, including low productivity, high prices, and technological problems. Industry proponents also note that many international competitors protect and subsidize their shipbuilders.²⁶

The relative weakness of the U.S. commercial shipbuilding industry matters insofar as the private sector provides a foundation for naval construction. At least in theory, a healthy commercial shipbuilding sector would be a source of innovation (in new technologies as well as in manufacturing processes), trained labor, and, perhaps, investment capital. Under current conditions, this relationship between naval and commercial shipbuilding is almost reversed. The U.S. Government (through the resources of thá Navy, the Defense Advanced Research Projects Agency, and other departments) provides the impetus for innovation, seeks to ensure a supply of skilled professionals, and underwrites much of the industries’ capital investment.

Naval trade. The U.S. naval shipbuilding industry has not broken into international markets for warships as much as might be supposed, given the pressure for profits and the competitive advantage American shipyards would appear to have in naval warfare systems. One reason underlying this failure is “that foreign navies do not require the types and configurations of vessels built for the U.S. Navy.”²⁷ With the decline of the Soviet-era navy (now parceled out among Russia and Ukraine), few countries aspires to maintain large, global blue-water fleets; those that do so, including France and Great Britain, build their own warships.²⁸ American shipyards do, however, continue to pursue, sometimes successfully, contracts to build mid-sized naval vessels such as corvettes and frigates. Further, the United States continues to sell older or surplus vessels abroad such as Oliver Hazard Perry–class frigates to customers such as Turkey and Taiwan. Usually such sales include contractor services for engineering, repairs, training, and other purposes, thereby providing a much-needed source of revenue for the American naval industry.²⁹ However, the larger profit margins that could be obtained through the sale of very large (and sophisticated) combatants, such as aircraft carriers, amphibious assault ships, or cruisers, are not realized.

As for American imports of naval warships, this is the “third rail” of U.S. naval procurement policy: when proposed or even discussed within the national security community, the Congress—spurred on by the shipbuilding lobby—quickly rallies against such proposals. In 2000, for example, the American Shipbuilding Association (ASA), an industry lobby group, helped rally opposition to proposed legislation that reportedly “would have waived the U.S.-build laws for combat support ships, and allow the Navy to purchase these ships from foreign shipyards.”³⁰ While ASA expressed its concerns to then-Secretary of Defense William Cohen, several members of Congress “moved quickly to kill the legislative proposal,” and union officials questioned the economic patriotism of the Pentagon. Whether substantial cost savings could be achieved, allowing foreign shipbuilders into the American naval market would presumably encourage reciprocity and perhaps fuel further technological advances. Yet despite the gains that might be achieved through this legislation, there is little reason to believe the United States will purchase foreign-built naval vessels in the near future.

Trade in the components and systems that comprise warships is nearly as stunted. Foreign sourcing accounts for only 4 percent of the materials purchased by American shipbuilders—including both commercial and naval construction. Moreover, there are strong indications that the percentage of foreign-sourced materials that enter into American warships is much lower than in commercial vessels.

In some areas of potential international demand, the American naval domestic industrial base has atrophied, largely because the U.S. Navy no longer purchases those items. Conventionally powered (diesel) submarine construction may represent a paradigmatic case where certain engineering skills and trades have been lost to the United States. The last diesel submarine was built for the U.S. Navy in 1959. Some analysts have argued that without expensive investments, the United States—the world’s leader in the construction of nuclear submarines—is no longer able to build conventionally powered submarines quickly and efficiently. Australia’s struggle to build Collins-class submarines points to the difficulties that the United States might face if it decides to fulfill its promise to Taiwan through renewed domestic production.³¹ Northrop Grumman seems undeterred, however, following its acquisition of Newport News Shipbuilding in 2001. In recent reports, company spokesmen claim that Newport News has the “capacity, the capability and the interest” to compete for prospective Taiwanese diesel submarine contracts.³² Proof of this assertion will come when, and if, Newport News bids for the contracts, the Taiwanese government accepts or rejects the bid, and the diesel submarines are actually built and become operational.

Although the United States no longer appears to require the capability to build diesel submarines for its own navy, numerous friends and allies (including, for example, Germany and Japan) maintain this capacity. Several geopolitical revivals such as Russia also have had success selling their diesel models in international markets. In the wider context of U.S. national security policy, this shortfall has two implications. First, because it cannot produce some systems itself, the United States must approach third parties to supply American client states. In some circumstance, third parties may not be willing to accede to the U.S. request, no matter who is paying or how much, because they have their own foreign policy objectives. In the case of selling diesel submarines to the Taiwanese, potential suppliers appear to be dissuaded by the potential reaction by China. The People’s Republic has made it clear that it will take strong actions against any firm and country that does business with Taiwan.

Second, the difficulties faced by the United States in fulfilling its promise to Taiwan pale in comparison to lost opportunities to supply “the emerging market for nonnuclear submarines.”³³ Analysts predict that global demand for nonnuclear submarines will increase over the coming decades as a high percentage of existing submarines reach the end of their service lives. After all, nonnuclear submarines allow nations to use undersea warfare at relatively low cost. Prospects for the United States to reenter the market successfully appear dim, regardless of Northrop Grumman’s plans, as 12 nations already design, build, and export nonnuclear submarines, while at least 4 more countries build under licensing agreements.

At the opposite end of the spectrum, the U.S. defense industrial base provides the Nation with naval systems that are not otherwise available from foreign suppliers. American aircraft carriers, for example, are not, strictly speaking, equivalent to British, French, or even Russian (Soviet-era) ships. They are larger, faster, and capable of carrying more aircraft. Few would seriously propose selling supercarriers abroad; but even if the U.S. Government was willing to allow such sales, the market for such products—as previously noted—would be limited. However, small deck conventional carriers remain a different story. Recent reports suggest that demand is growing, especially in East Asia.³⁴ But since the United States does not buy such ships, the U.S. defense industrial base has been unwilling to make the investments necessary to compete in this international market.

In sum, with regard to import and export of ships and specialized naval systems more generally, American participation in global markets appears limited with the possible exception of second-hand ships sold after they have completed their service with the U.S. Navy.

Innovation. One of the cherished notions of those who are convinced that globalization matters for the defense industrial base is that the commercial sector is “out-innovating” the defense sector. In some areas, this observation seems to be borne out. Commercial R&D in the information technology sector, for example, now vastly outstrips defense sector investment. In the international shipbuilding sector, commercial R&D investments for such things as process engineering exceed public sector investments. Unfortunately, this investment-driven innovation in the shipbuilding sector resides largely in other countries such as Japan, South Korea, and China. Given the predominance of commercial shipbuilding globally and America’s relative backwardness in commercial shipbuilding, this might appear to represent a challenge to American naval shipbuilding leadership. Most American producers of warships seem fated to use high-cost, inefficient manufacturing processes and pass the higher bills to the U.S. Government.

The Navy has taken steps to explore promising technologies developed elsewhere in the world. A case in point is the high-speed vessel Joint Venture (HSV–XI), an Australian-made catamaran that can operate at high speeds and in shallow waters. Joint Venture is a follow-on to HMAS Jervis Bay, a high-speed ferry leased by the Royal Australian Navy for operations in East Timor. Under the Army’s High-Speed Vessel program, the United States has leased Joint Venture from the Australian firm Incat, which converted it from a commercial vessel to a theater logistics vessel in Hobart. Incat then contracted with the Bollinger Shipyard, a U.S. shipbuilder that operates facilities in Louisiana and Texas, to support the high-speed catamaran during its one-year charter.³⁵ In a similar fashion, the Marine Corps is leasing the Westpac Express, a 331-foot ferry, in a joint venture between the Australian shipyard Austal Limited and another Gulf Coast shipyard, Bender Shipbuilding and Repair.³⁶

The HMS Triton represents another model for the future—collaborative development between the United States and an ally, this time Great Britain. Such collaborative development offers the possibility of sharing R&D costs and combining technical capabilities to produce a more innovative product than might have been otherwise possible. In addition, if ultimately satisfactory to both parties, it could provide for a larger production run since, presumably, both partners will have a stake in procuring offspring of the developmental model.

A question arises as to whether these strategies of accessing ship technologies from abroad are sustainable. Leading high-technology vessels from joint ventures between foreign and American shipyards is one thing; entering into a large-scale procurement relationship is another. Political and economic disputes about prospective divisions of labor, not to mention questions of industrial security, may lie ahead if the naval services decide that high-speed vessels designed and built by foreign firms are necessary to field the future fleet. However, from a technology standpoint, this strategy may be desirable—at least in the short run. The services and American partner shipyards can gain access to technologies that might otherwise require prohibitive domestic investments.

From a broader perspective, the innovations represented by the Joint Venture and HMS Triton are indeed the product of competition—by foreign governments and shipyards seeking niches in international markets and competitive advantages in battle. As the high-speed vessels produced by Incat and Austal suggest, one potential source of competition for the “big six” U.S. defense corporations is in international naval shipbuilding. It is no secret that the American shipbuilding industry lags behind major international competitors in a number of areas, including small ship design and manufacturing technology. In theory, the United States could farm out production of all or part of its naval ships—at the very least, the construction of hulls—to the most technologically advanced shipyards in Europe and Asia. But as discussed above, political and security concerns virtually preclude such possibilities, even, it appears, on a small scale. Such international competition is unlikely given the political considerations of jobs and technological costs. On the security side, many officials and Congressional leaders are already concerned with safeguarding secrets in domestic industrial facilities. It is difficult, if not impossible, to imagine such concerns not arising with foreign purchases, particularly if maintenance and support requirements allow foreign access to increasing portions of the U.S. defense industrial base.

The American naval shipbuilding industry may yet experience changes that increase the influx of innovation into the sector from abroad, or that introduce more competition into the sector within the United States. For example, some analysts argue that the hull is perhaps the least important part of the ship. What goes inside the ship—power plants, weapon systems, electronic suites, communications systems, sensors and the like—are the most sophisticated components of ships. Arguably, they present tremendous integration problems for shipbuilders and perhaps should be left to defense primes who are in the business of integration. By this logic, it makes little sense for Newport News or Electric Boat to maintain in-house integration capabilities. Indeed, as subsidiaries of larger holding companies—Northrop Grumman and General Dynamics respectively—they benefit from the internal systems integration capabilities of other divisions with their parent firms.

Could a foreign prime such as BAE Systems or EADS acquire a smaller shipyard and use it as means to enter into competition with the U.S. big six?³⁷ In an era where it appears that smaller, faster, and lighter are gaining attention with naval and defense analysts advocating transformation, perhaps second-tier shipyards could reenter the markets for U.S. warships. Current research into this area remains mixed. Although shipbuilders such as the Australian firm Austal clearly would like to break into the U.S. naval market and have entered into joint ventures to do so, many smaller yards appear uninterested in emerging naval markets. Some shipyards such as San Diego-based National Steel and Shipbuilding Company, recently purchased by General Dynamics, see their niche as building lower-end transports rather than surface combatants. They apparently believe that the size of the prospective market, the erosion of their own capabilities, and the costs of reacquiring lost capabilities are prohibitive. They have little desire to help build the “Navy after next” except within the narrow parameters that they already participate. Others, such as Todd Pacific Shipyards in Seattle, appear to have little interest building warships at all—despite their long and storied relationship with the U.S. Navy.³⁸

Could commercial shipyards abroad, especially those controlled by adversaries or potential adversaries, acquire the naval systems and systems integration capabilities to challenge the supremacy of American warships? Although it seems highly unlikely that this would occur on a grand scale, the possibility of niche competitors arising—fueled by countries seeking asymmetric responses to the American revolution in military affairs—may be possible. As highly respected analyst John Battilega argues:

Investment/Production. The United States produces the most successful warships in the world and has done so at least since the beginning of World War II. It produces a wider range of technologically sophisticated warships than any of its allies, friends, enemies, or potential adversaries. Current plans to recapitalize the fleet, even if undertaken in an austere budget environment, will continue to strengthen American naval leadership. Although some nations produce highly capable warships in niche areas (Russia’s Sovremenny-class destroyers, for example), no nation currently plans to build ships to match future-generation destroyers (DD[X] program), much less the next generation CVX aircraft carrier. American naval planners call for the next-generation warships to push already state-of-the-art naval technologies still further to achieve gains in propulsion, manning, communications, stealth, and lethality.

Joint ventures, teaming, and licensing arrangements that would allow the U.S. Government and American shipbuilders to develop cooperative relationships with foreign yards are feasible. Cooperation between U.S. and international shipbuilders are as likely to involve yards such as Bender and Bollinger as the big six, thereby potentially broadening the shipbuilding landscape.

Beyond traditional shipbuilding. Admittedly, thinking of the naval industrial base solely in terms of shipbuilding is an anachronism. Modern navies such as that of the United States rely only partly on ships to project power and perform the traditional functions of a maritime power. The U.S. Navy buys items from data processing systems to aircraft that draw upon the entire range of defense industries. As a consequence, the preceding analysis of the changing nature of the American naval shipbuilding industry in a globalizing and/or regionalizing world may miss important developments relevant to the future of the naval industrial base. Changes in the aircraft industry, for example, including the long-term implications of the recent down-select decision on the Joint Strike Fighter, will almost certainly affect the evolution of American naval aviation (see chapter 18). For another example, the emergence of UAVs and other unmanned vehicles of all sorts may allow smaller American firms or even foreign firms to play a larger role in U.S. acquisition programs in the coming years. From this perspective, assessing the state of the naval industrial base in the face of globalization (or Americanization, internationalization, and regionalism, for that matter) will require further analysis of issues beyond traditional shipbuilding.

Conclusion

Naval shipbuilding is clearly not undergoing a process of globalization, at least as conventionally understood. It may eventually undergo regionalization or regionalism (if prodded to do so by government authorities), but—at least to date—this appears possible only within the confines of the European Union or, perhaps, on a bilateral basis with close American allies such as Australia. But it still seems unlikely to occur on a grand scale, even across the Atlantic.

This finding reflects both general trends within the overall defense industrial sector and the conflict of logic that underlies arguments about defense sector globalization. What some analysts have referred to as defense globalization is largely a trans-Atlantic phenomena pursued by profit-seeking defense firms in North America and Europe. It is also largely a product of the fitful efforts of public officials in the United State and the European NATO member states to improve NATO interoperability and to strengthen political and economic relationships that have weakened since the end of the Cold War. In the shipbuilding sectors more specifically, even these modest efforts on the part of firms and governments have foundered on the politics of producing ships. Large facilities employing large numbers of highly skilled workers and dealing with technologically sensitive systems are simply not clear candidates for the types of laissez-faire policies that have allowed other industries to globalize over the last 3 decades.

However, this conclusion does not preclude that naval shipbuilding may regionalize in the future as the larger defense conglomerates seek larger shares of all phases and all types of weapon systems production. In the trans-Atlantic region, longstanding security ties and a commonality of interests on a global scale may lead to more cooperation among defense industries and a reduction in the number of state-to-state barriers. The current war on terrorism, which has featured close cooperation in the North Atlantic region, may even provide an opportunity for regionalism, if not globalization.⁴⁰ As discussed above, this process has already begun for larger defense primes, especially on the European side, as firms such as BAE seek a share of growing American defense procurement budgets.

It should be noted again that powerful political forces are allied against further integration and that the strength of future ties will require a greater exercise of political will on both sides of the Atlantic. For this to happen, considerable trust will be required. The United States and its partners must be able to share technologies, profits, and costs without focusing exclusively on the dangers of technological diffusion or the local economic impact of further industry rationalization.

Even if trans-Atlantic regionalism succeeds, it remains to be seen whether it will eventually serve as a model for other regions such the Pacific Rim or Southeast Asia. Proponents of defense industrial integration need to remember that relations with Asian friends and allies have rarely achieved the level of intimacy and institutionalization that have characterized U.S.-European relations. Where the trans-Atlantic region has NATO and the European Union, the two most successful regional organizations in history, the Pacific Rim has the Association of Southeast Asian Nations and now Asia Pacific Economic Cooperation, two organizations whose promise has rarely been matched by real progress.

In the end, regionalization and regionalism may be better approaches to understanding the changing nature of the global economy with regard to defense industries and naval weapon systems. And—for the most part—the only area of the world economy that is approaching a more integrated system is in the Euro-Atlantic region. But this should be comforting for American and European national security analysts. The specter of globalization applied to defense industries is scary: a vision of technological diffusiýn, arms races, unbridled sales, lost technical superiority, and, ultimately, the creation of fertile ground for more arms races. In contrast, regionalization promises a future that is quite familiar and indeed manageable through existing policy instrumentsýand institutional arrangements (including NATO and longstanding European Union–U.S. ties). For further integration, political and military leaders will have ample opportunity to weigh risk and benefits while negotiating with stakeholders over the nature and extent of globalization to be allowed in the coming years.

Peter Dombrowski is associate professor in the strategic research department of the U.S. Naval War College, where he is working on a major study of “Military Transformation and Defense Industry After Next.” Previously he was associate professor of political science at Iowa State University. He is the author of Policy Responses to the Globalization of American Banks (Pittsburgh: University of Pittsburgh Press, 1996), as well as articles in numerous journals. He also serves as the co-editor of International Studies Quarterly and as the president of the International Political Economy Section of the International Studies Association. The author would like to acknowledge the influence of Andrew Ross and Eugene Gholz on his thinking about defense industrial globalization.

Notes

¹ Robert Gilpin and Jean Millis Gilpin, The Challenge of Global Capitalism: The World Economy in the 21^st Century (Princeton, NJ: Princeton University Press, 2000), 19. BACK

² For a variety of perspectives, see The Global Century: Globalization and National Security, ed. Richard L. Kugler and Ellen L. Frost (Washington, DC: National Defense University Press, 2001). BACK

³ See Office of the Under Secretary of Defense for Acquisition and Security, Defense Science Board, Final Report of the Defense Science Board Task Force on Globalization and Security (Washington, DC, December 1999), especially, 47–48. For a private sector perspective, see DFI International, A Blueprint for Action, report from the AIAA Defense Reform 2001 Conference (Washington, DC, February 14–15, 2001), 36–37. BACK

⁴ Mattias Axelson with Andrew James, The Defense Industry and Globalization, FOA–R–00–01698–179–SE (Stockholm: Division of Defence Analysis, Defence Research Establishment, December 2000). BACK

⁵For a contrasting view, see Andrew L. Ross, “Defense Industrial Globalization: Contrarian Observations,” prepared for an Atlantic Council Conference on Defense Industry Globalization (Washington, DC, November 16, 2001). BACK

⁶ Judith Reppy, “Conceptualizing the Role of Defense Industries in National Systems of Innovation,” in The Place of the Defense Industry in National Systems of Innovation, ed. Judith Reppy, Occasional Paper no. 25 (Ithaca, NY: Cornell University Peace Studies Program, April 2000), 9. BACK

⁷ On the hows and whys of firm-level efforts to globalize, see Axelson, 19–21. BACK

⁸ Reppy, 8. BACK

⁹ Ann Markusen, “The Rise of World Weapons,” Foreign Policy 114 (Spring 1999), 40. BACK

¹⁰ Ibid., 43. BACK

¹¹ Concerns about the globalization of second-tier firms that supply components to primes and first-tier arms manufacturers as well as directly to governments deserve serious attention. Richard Bitzinger, for example, suggests that a global arms industry is emerging, structured along a “hub and spoke model” in which “a few large first-tier firms operating at the center” with “lines of outsourced production extending out to second tier states on the periphery.” Given space limits for this chapter, the “globalization” of second-tier defense suppliers will not be systematically examined here. See Richard Bitzinger, “Twilight of the Demigods: The Dilemma Facing Second-Tier Arms-Producing Countries in the Post-Cold War Era,” unpublished manuscript based on the author’s forthcoming book, Putting the Future Behind Them: The Failed Dreams and Lowered Expectations of Second-Tier Arms Producing Countries in the 21^st Century. BACK

¹² Glenn R. Simpson, “Treasury Interpretation of Law Lets Bush Delay Taking Sides in Dutch-U.S. Merger,” The Wall Street Journal, April 27, 2001, A20. See also Glenn R. Simpson, “Pentagon Moves to Postpone Dutch Deal for Silicon Valley Group,” The Wall Street Journal, March 8, 2001, B6. BACK

¹³ John Lovering, “The Defense Industry as the Paradigmatic Case of ‘Actually Existing Globalization,’” in Judith Reppy, ed., 13–24. BACK

¹⁴ For an example of this type of reasoning, see Frank J. Gaffney, Jr., “Defense Fire Sale Redux,” The Washington Times, April 3, 2001, 15. BACK

¹⁵ For an overview of developments and future prospects in these regions, see Alan Smith and Michael Meese with Hartmut Spieker, Defense Economics: Reform, Restructuring, Realignment, a report of the George C. Marshall European Center for Security Studies, accessed at <http://www.marshallcenter.org/Conference%20Center/Conference%20Reports.htm>. BACK

¹⁶ On current Russian defense exports, see Aleksey Nikolskiy, “Russia has Overtaken France in Military-Technical Cooperation,” Moscow Vedemosti, January 14, 2002(FBIS translated text, document ID: CEP20020114000328). BACK

¹⁷ Edward D. Mansfield and Helen Milner, “The New Wave of Regionalism,” International Organization 53, no. 3 (Summer 1999), 591. BACK

¹⁸ Alberto Lina, “Joint Ventures,” briefing at the Globalization of the Defense Industry Conference, The Royal Institute of International Affairs (London, England, January 30, 2001), slide 6. BACK

¹⁹ See “Western European Industry Ownership Jigsaw Puzzle,” Defence Systems Daily, accessed at <http://defence-data/current/pagerip1.htm>. BACK

²⁰ Philip Finnegan, “Defense News Top 1000: Europeans Make Great Strides Against U.S. Megafirms,” Defense News, August 7, 2000,. BACK

²¹ Axelson, 35. BACK

²² Vago Muradian, “Camus Hopes EADS Can Crack U.S. Defense Market Within Four Years,” Defense Daily, April 23, 2001,. BACK

²³ For a sophisticated argument as to why more cross-national mergers will not occur, see Eugene Gholz, “The Political Economy of Cross-Border Defense Industry Mergers,” unpublished manuscript, March 2000. BACK

²⁴Alexander Moens with Rafal Domisiewicz, European and North American Trends in Defence Industry: Problems and Prospects of a Cross Atlantic Defence Market (Ottawa: Department of Foreign Affairs and International Trade, April 2001), 23. BACK

²⁵ Robert P. Haffa, Jr., “Globalization, the War on Terrorism, and the U.S. Defense Industry,” paper prepared for an Atlantic Council Conference on Defense Industry Globalization (Washington, DC, November 16, 2001), 14. BACK

²⁶ A major theme of U.S. Department of Commerce, National Security Assessment of the U.S. Shipbuilding and Repair Industry (Washington, DC: U.S. Department of Commerce, May 2001). BACK

²⁷ Ibid., 27. BACK

²⁸ The lack of global interest in blue-water fleets is a key theme of Sam J. Tangredi, “Beyond the Sea and Jointness,” U.S. Naval Institute Proceedings 127, no. 9 (September 2001), 60–63. BACK

²⁹ For a recent example, see “Possible Sale of Perry Class Frigates to Turkey,” Defense Systems Daily, January 25, 2002. BACK

³⁰ “Pentagon Proposal for Foreign Build Navy Ships is Killed,” American Shipbuilder (October 2000), 2, accessed at <http://www.americanshipbuilding.com/news-oct00.htm>. BACK

³¹ Lee Willett, “Global Submarines,” accessed at <http://global-defence.com/subs.html>. BACK

³² Michael Fabey, “Northrop to Bid on Subs for Taiwan: NNS Yard’s Expertise Gives it an Advantage,” Newport News Daily Press, January 24, 2002, A1. BACK

³³ Joshua Corless, “Fresh Approach to Submarine Upgrades,” accessed at <http://www.global-defence.com/99/seasys/sea1.htm>. BACK

³⁴ Damon Bristow, “Weighing the Balance of Power: Aircraft Acquisition on the Up in East Asia,” accessed at <http://www.global-defence.com/99/1998/SeaSystems/weigh.htm>. BACK

³⁵ Frank Wolfe, “Marine Officials Ride Austr alian-Built High Speed Vessel,” Defense Daily, November 20, 2001, 4. BACK

³⁶ “Marines Getting Good Results with Australian High Speed Vessel,” Inside the Navy, October 15, 2001, 9. BACK

³⁷ The big six of American defense companies refers to Lockheed Martin, McDonnell Douglas, Boeing, General Dynamics, Northrup-Grumman, and Raytheon. However, post-Cold War mergers and acquisitions periodically threaten to shift this lineup. Other companies such as General Electric still do substantial military business. BACK

³⁸ On the aspirations of NASSCO and Todd Pacific, information was obtained through author interviews throughout 2001. BACK

³⁹ John A. Battilega, Transformation in Defense Markets and Industries: Implications for the Future of Warfare, Volume 1: The Emerging Global Armament Systems and the Future of Warfare, prepared for the National Intelligence Council and the Office of the Secretary of Defense (Net Assessment) (Greenwood Village, CO: SAIC, February 1, 2001), 5. See also 29–30 and details in Battilega et al., Volume 3: Country Studies. Battilega’s work (four volumes) is the most extensive study on the trends of post-Cold War global defense market that is currently available to researchers. BACK

⁴⁰ Haffa makes a similar argument in “Globalization, the War on Terrorism, and the U.S. Defense Industry,” although he does not make the distinction between globalization and regionalism as argued in this chapter. BACK