TONELSON: U.S. must stop using China’s fake military parts

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ANALYSIS/OPINION:

While addressing West Point’s newest graduates last weekend, Vice President Joseph R. Biden praised the gathered cadets as “leaders of your generation” and “the key to whatever challenges the world has in store.”

For full disclosure’s sake, Mr. Biden should have added: “For the foreseeable future, however, the advanced weapons and military systems you’ll use in training and in combat will remain shot through with unreliable counterfeit electronics parts.

“These mislabeled components can fail without warning, or carry spyware and malware. And they will keep threatening American security - and your lives - largely because your political leaders don’t want to disrupt economic ties with the biggest counterfeiter by far - China.”

This charge sounds harsh, but the Senate Armed Services Committee has once again just reminded Americans that counterfeit imported electronics parts have been “flooding” into major U.S. military systems for years. Following up November hearings, a May 21 report by the panel described how, in 2009 and 2010 alone, staff found more than 1 million individual “suspect” parts bound for use or actually installed in several types of military aircraft, and even in the Pentagon’s anti-ballistic missile systems. More than 70 percent of those suspect parts were traceable to China. Moreover, such counterfeiting has been public knowledge since being spotlighted in a Commerce Department report released in January 2010.

The best data available indicate just how alarmingly America’s vulnerability has grown. U.S. Business and Industry Council research shows that as of 2010, products from China controlled nearly 28 percent of the total U.S. market for a huge group of civilian electronic components widely used in U.S. defense goods. This Chinese market share has roughly tripled since 1997. Chinese import penetration rates are nearly as high and also surging in categories such as printed circuits, printed circuit assemblies, resistors, transformers and broadcast and wireless communications equipment.

Have the new armed services findings finally awakened Washington? Fixes enacted last December include increasing inspections and tests of imported electronics parts; banishing unreliable companies from defense supply chains; requiring prompt reporting of counterfeits by contractors; and forcing defense firms to pay for replacing fakes.

But these measures remain dwarfed by the policy failure that originally shredded the supply chain’s integrity: Outsourcing-focused trade policy decisions since the early 1990s that, with the enthusiastic support of major defense contractors and big technology companies, have sent much advanced U.S. electronics production to China.

As long as U.S. companies can supply lucrative American civilian and defense customers from very low cost, highly subsidized, regulation- and tax-free Chinese production sites in particular, the Pentagon will remain dangerously dependent on a country that’s anything but friendly and whose systemically secretive, cronyist business practices can frustrate even the most intrusive - i.e. unrealistic - monitoring and inspection programs.

Outsourcing’s very scale seems to rule out the obvious anti-counterfeiting alternative - phasing in strict domestic content requirements for defense-related electronics, and eventually for all defense-related goods. But the Senate committee report reveals that the economics of “reshoring” are already surprisingly promising.

After all, their own better quality-control efforts will boost contractors’ costs, as will the expense of replacing fakes. Extensive government inspection regimes will add to Pentagon budgets. And unless Washington’s implementation of such programs suddenly improves, fake Chinese parts inflows will also keep needlessly raising overall defense outlays by undermining equipment reliability.

Although America has its own unscrupulous businesses, domestic production would be much cheaper to monitor effectively for logistical reasons alone. Don’t forget the economic payoffs of recouped output, jobs, innovation capacity and taxable business activity. Throw in improved national security, and it’s clear that even the substantial short-term challenges of globally restructuring this major industry don’t remotely offset the upside. Such a shift should be tackled before next spring’s military academy graduates start serving their country.

Alan Tonelson is a research fellow at the U.S. Business and Industry Council, a national business organization whose nearly 2,000 members are mainly small- and medium-sized domestic manufacturers. Author of “The Race to the Bottom,” Mr. Tonelson also is a contributor to the council’s website: www.AmericanEconomicAlert.org

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