I would like first of all to thank Chairman Masuda and the members of the Keidanren Defense Production Committee for hosting this luncheon and providing this opportunity today to discuss issues that are important to the security alliance between our two nations. My prepared remarks for today focus on our defense industrial cooperation in an age of globalization, but I would also be pleased to answer questions that you may have concerning regional security issues and other aspects of our security relationship.
My main subject today is a sometimes under-publicized but vital aspect of U.S.-Japan security relations. That is our cooperation in developing and procuring defense equipment and technologies. While much of our collaboration to date has been channeled through government programs, direct interaction between our defense industries will be a critical element in future research, development, and acquisition efforts. Increasingly, such cooperation will be influenced by trends toward the globalization of defense industries taking place today. As we move further into the post-Cold War era, it will be more important than ever to ensure that our defense industrial cooperation complements developments in U.S.-Japan security relations.
As you know, the past few years have seen profound changes in both U.S. defense acquisition policies and the structure of our defense industry. Reforms in Department of Defense research, development, and acquisition have focused on a more efficient use of limited resources, emphasizing commercial purchases and business practices where possible. Meanwhile, defense industry consolidation has seen some fifty independent defense firms at the beginning of this decade merged into the top five U.S. defense contractors of today. This dramatic consolidation was the inevitable result of greatly reduced defense procurement budgets. These budgets are only this year beginning to increase as we struggle to commit more resources to equipment modernization.
Industrial consolidation has begun to pay major dividends in our efforts to support the modernization of U.S. defense forces. A recent Congressional report listed more than $2 billion in savings for DOD over the past three years as a result of defense industry mergers. Yet, while encouraging consolidations to a point, we have also insisted on maintaining competition. Despite significant restructuring and consolidation within the U.S. defense industry, there are still at least two U.S. contractors with design and manufacturing experience in each critical defense product area.
Reform of government acquisition practices and industrial consolidation aimed at more effective defense acquisitions will continue for some time. Success will depend not only on developments within the U.S. but on progress in international armaments cooperation. Not so long ago we viewed international programs mostly as exercises in security assistance. We sold or licensed U.S. equipment, while viewing collaboration in R&D and use of systems or technologies developed in other countries as occasionally desirable but seldom essential factors in U.S. acquisition programs.
Our view of international programs is quite different today in two vital respects. First, we face a growing reliance on coalition operations to maintain peace and stability. Second, we need to make more effective use of limited budgetary, industrial, and technology resources.
The critical importance of interoperability was demonstrated during the recent allied operations in Kosovo. Despite an unprecedented level of burden sharing and teamwork among allied forces, effective operations were hindered by disparities in equipment, logistics, and communications. Kosovo also taught us that the technological gap between the U.S. and our European allies is widening. Such experience confirmed the need for NATO’s approval earlier this year of a Defense Capabilities Initiative that calls for improvements not only in effective engagement, but also in mobility, logistics, communications, and survivability of infrastructure.
These lessons of Kosovo are relevant to other international operations, regardless of scale. Contributions of the U.S. and various allies to a given operation may vary widely from front-line presence to rear-area support, but effectiveness in all cases will depend on compatibility of hardware and connectivity in communications and data sharing.
Thus, both operational concerns and resource constraints have caused us to reconsider our approach to defense acquisitions. Moreover, resource constraints also drive the industrial restructuring that is leading toward a globalization of defense-related production. DoD must factor these trends toward coalition operations and industrial globalization into its acquisition strategy.
This understanding is behind the U.S. approach to armaments cooperation with our key allies. In Europe, budget-driven acquisition reform measures and movement toward industrial consolidation are already well underway. Issues of efficiency, competition, and innovation are all evident in European consolidation, as they are within U.S. defense industry.
There are two directions in which this consolidation can move. The first is toward what has been called "Fortress Europe -- Fortress USA". In this model, head-on competition among "European champions" and their U.S. counterparts could easily cause a split in NATO’s defense industry and technology base, leading to an inevitable weakening of the Alliance. The alternative model, which is more reflective of trends toward globalization taking place outside the defense arena, is that of competitive transatlantic industries. Here, multiple firms operating on both sides of the Atlantic compete in both Europe and the U.S., and thus support international development and procurement efforts. This model would maintain the benefits of competition, open large markets to both U.S. and European firms, reduce incentives toward third-world proliferation, and naturally strengthen the Alliance structure.
Of course the transatlantic model is the harder one to achieve. There will be impacts on political and economic interests among all parties, and international armaments programs will increase the potential security risks inherent in transfers of militarily significant technologies. Nonetheless, the benefits of international armaments cooperation are such that we must deal with these problems and manage these risks. Evolution towards this transatlantic model is the focus of current Defense Department discussions with senior NATO acquisition officials as well as key members of U.S. and European industries.
In the same manner, we must also think carefully about how trends in international armaments cooperation will affect the U.S.-Japan security alliance. Obviously conditions governing Japan’s defense acquisitions and the operations of its defense industry differ substantially from those in Europe. Defense sales are only a small portion of total sales for most large Japanese contractors. In addition, Japan’s arms export restrictions severely limit the market available to Japanese defense contractors. Such factors suggest a different approach toward industry restructuring in Japan than the models we are seeing in the U.S. or Europe.
Still, the conditions facing Japanese defense programs are not entirely unique. Japan too faces growing constraints on its defense procurement budgets. Especially in recent years, constraints on the Japan Defense Agency’s budget have meant fewer programs and smaller purchases to spread among Japan’s defense industrial base. As a result, acquisition reform, and a focus on cost control has become a major concern in the Japan Defense Agency.
Of course, Japan must maintain its independence in making defense acquisition decisions and supporting its industrial base. And there will always be some sectors in which maintenance of a domestic capability will be essential to national security, even at increased cost. But it is clear that a goal of autonomy in defense research, development, and acquisition is as unrealistic for Japan as it has become for the U.S. or for our European allies. Moreover, it is detrimental to our overall security cooperation.
Thus we need a framework in which the U.S. and Japan can pursue mutually beneficial armaments cooperation efforts within continuing legal and policy constraints. The first thing is to recognize that this framework will differ significantly from patterns of the past. While we expect that sales and licensed production of U.S. systems will still be a major part of programs with Japan, armaments cooperation as we understand it today reaches well beyond such activities to encompass cooperative development and production of defense systems and technologies. Such collaboration can be encouraged through government initiatives or through industry-based joint ventures and teaming arrangements. Ideally, governments will cooperate to define the overall military requirement and legal framework in which cooperation can take place, and then healthy companies will decide what kinds of industrial cooperation make the best business sense as they compete for these opportunities.
The beginnings of such cooperation are already evident in Theater Missile Defense R&D and other projects under the U.S.-Japan Systems and Technology Forum, the next meeting of which will bring Under Secretary Gansler to Tokyo in January. Again, the key for armaments cooperation remains interoperability, but not just interoperability in the sense of common hardware. Consistent with the objectives of the revised Guidelines for U.S.-Japan Defense Cooperation, U.S. and Japanese forces must connect and interact effectively in situations in areas surrounding Japan, as well as in overseas peacekeeping and humanitarian relief operations. Whether or not the specific hardware is the same, we must be interoperable.
The next point concerning U.S.-Japan armaments cooperation is that it must be based on an understanding of shared interests in operational, technological, and acquisition requirements. Dialogues focused on military requirements should take place in both government and industry channels. And these conversations must begin earlier in each side’s acquisition cycle, before program decisions are made that cannot easily be changed.
A lack of such early, frank dialogue to define common interests contributed to some of the controversy surrounding the development of Japan’s F-2 fighter. Neither side can afford to repeat the sort of misunderstandings and friction that have marked that program. In contrast, the recent successful conclusion of agreements on cooperation in ballistic missile defense R&D and reconnaissance satellite development suggest that we are moving in the right direction. Similarly, the ongoing dialogue between our navies on mission requirements and systems capabilities for future Maritime Patrol Aircraft points the way toward collaboration rather than confrontation. We hope that this will lead to acquisition solutions that support our mutual security interest in continued close cooperation in this critical mission area.
The development of armaments cooperation between the U.S. and Japan will require adjustments in the policies and practices of both sides. Japanese dissatisfaction with our Foreign Military Sales (FMS) procedures is well known to us, as is concern over U.S. export licensing procedures, and the perceived restrictiveness of our technology release policies.
I can assure you that the implementation of more flexible, efficient approaches to FMS and commercial programs are issues receiving a great deal of attention at DOD. In this context, we are also exploring ways with our colleagues in the State and Commerce Departments to facilitate export licensing procedures. We recognize that appropriate protection for vital defense technologies must be balanced by a more forthcoming approach to the development and sharing of such technologies with key U.S. allies. I am also confident that arrangements for collaborative defense industrial programs will continue to include appropriate provisions for the protection of Intellectual Property Rights among all concerned parties.
On Japan’s part, we hope for continuation of a more forward-looking vision of armaments cooperation that is not confined to licensed production or isolated technology developments. It is, of course, for Japan to decide how its defense acquisition strategy should combine foreign purchases, licensed production, joint projects, and indigenous efforts. However, for Japan, as for the U.S., investment in defense programs should recognize the growing connections between international and domestic interests. Japan’s arms export restrictions are of particular importance in this regard. I want to reaffirm U.S. understanding and strong support for Japan’s "Three Principles" policy on arms exports. At the same time, moving beyond the limited research cooperation we have pursued thus far will require increased flexibility in the application of the Three Principles as they pertain to joint programs that support the U.S.-Japan Alliance.
As I noted earlier, collaboration on missile defense technology and Japan’s planned acquisition of reconnaissance satellites embody key elements of our philosophy towards industrial cooperation. These programs represent a new level of cooperation in our security relationship that bridges defense and economic concerns. It is very important to understand four key aspects about the agreements that our governments have concluded on these programs. First, these programs support broad, shared political and security interests. Second, they address separate as well as shared concerns over the protection of critical technologies. Third, they protect each country’s independence in acquisition decision-making and in support for domestic defense industry. Fourth, they offer expanded opportunities for direct industry-industry collaboration.
In these respects I believe that our interaction in ballistic missile defense and satellite development helps to set a pattern for future armaments cooperation programs that benefit our industrial and technology bases, and that strengthen our security alliance.