It’s the 70th anniversary of the People’s Republic of China, which Xi Jinping is celebrating with aggressive rhetoric and a militaristic display of his ICBMs that can strike at the U.S. in 30 minutes. So today I’m going to write about how American aerospace monopolists, dumb Pentagon procurement choices, and the Bill Clinton administration helped create the Chinese missile threat we are now confronting.
In August of 1994, Bill Clinton’s Secretary of Commerce, Ron Brown, flew to China to try and seal two deals for American corporations. The first was to enable Chrysler the ability to build minivans in China, and the second was to get the Chinese to buy 40 MD-90 aircraft ‘Trunkliners” from McDonnell Douglas.
The McConnell Douglas deal was particularly important to the Clinton administration for a number of reasons. The company was dying; it was badly run by financiers who lacked an appreciation for quality production. More importantly, it had lost a key military contract for the F-22 in 1986, so the government felt an obligation to find customers to prop it up. There was also politics, with Bill Clinton trying to honor his unofficial 1992 campaign slogan, “it’s the economy, stupid.” Clinton would indeed hail the deal on the eve of the 1994 midterm election.
The Chinese agreed to buy the planes, but with one caveat. They wanted a side deal; McDonnell Douglas should sell a mysterious company called the China National Aero Technology Import and Export Corporation (CATIC) a set of specialist machine tools that shape and bend aircraft parts stashed in a factory in Columbus, Ohio.
When Chinese representatives went to Columbus, Ohio, workers wouldn’t let them see the tools, because workers realized that they would lose their jobs if the tools were sold to the Chinese. The Chinese then sent a letter to the corporation saying that the deal for the Trunkliners was at a stalemate, but if the machine tools were sold to a mysterious Chinese company, well, that would have a “big influence” on whether McDonnell Douglas could close the deal on the planes.
It wasn’t just the workers who caused problems. The government could have been a hurdle for McDonnell Douglas as well, because these weren’t just any old machine tools. “According to military experts,” reported the New York Times, “the machines would enable the Chinese military to improve significantly the performance abilities -- speed, range and maneuverability -- of their aircraft. And if diverted, they could do the same for missiles and bombers.” Selling the tools wasn’t just a commercial deal, the machining equipment was subject to export controls for sensitive national security technology.
It was an insane idea, selling the Chinese government this important machining capacity. The Pentagon protested vehemently, as did Republican Congressman Tillie Fowler, who was on the Armed Services Committee. Fowler said allowing the transfer to reflects an ''emphasis on short-term gain at the expense of national security and long-term economic gain.'' And yet that’s what McDonnell Douglas sought, and what the Clinton administration pushed through. The Commerce Department cleared the deal, in return for a pledge (or behavioral remedy) that China would not use the tools to build missiles, but would dedicate them to a civilian aircraft machine tool center in Beijing.
McDonnell Douglas basically knew the behavioral remedies were fraudulent almost immediately; one of the most important pieces of equipment was shipped not to Beijing but directly to a Nanchang military plant. It wasn’t just McDonnell Douglas who understood the con; Clinton officials had the details of the deal, and let it go through anyway. Why? They used the same excuses we hear today - competitiveness and a fear of offending China. Here’s the NYT explaining what happened.
Still, this was too little too late. The episode was by any metric catastrophic; the Chinese government got missile making machine tools in return for a promise they didn’t honor, which should have been a massive scandal, borderline treason. But ultimately it wasn’t a scandal, because Republicans, leading globalization thinkers, and Clinton Democrats decided that transferring missile technology to China didn’t matter.
Remember, during this entire period, Bill Clinton pressed aggressively to open up the U.S. industrial base to Chinese offshoring. And towards the end of the Clinton administration, McDonnell Douglas, as we all now know, later merged with Boeing, and that merger ended up destroying the capacity of Boeing - by then the sole American large civilian aircraft maker - to manufacture safe civilian planes.
How Bill Clinton Made the Worst Strategic Decisions in American History
Chinese power today is a result of a large number of incidents similar to this one, the wholesale transfer of knowhow, technology, and physical stuff from American communities to Chinese ones. And the confused politics of China is a result of the failure of the many policymaking elites who participated in such rancid episodes, and are embarrassed about it. As we peer at an ascendant and dangerous China, it makes sense to look back at how Clinton thought about the world, and why he would engage in such a foolish strategy.
Broadly speaking, there were two catastrophic decisions Clinton made in 1993 that ended up eroding the long-term American defense posture. The first was to radically break from the post-World War II trading system. This system was organized around free trade of goods and services among democratic nations, along with somewhat restricted financial capital flows. He did this by passing NAFTA, by bailing out Mexico and thus American banks, by creating the World Trade Organization, and by opening up the United States to China as deep commercial partners.
The Clinton framework gutted the ability of U.S. policymakers to protect industrial power, and empowered Wall Street and foreign officials to force the U.S. to export its industrial base abroad, in particular to China. The radicalism of the choice was in the intertwining of the U.S. industrial base with an autocratic strategic competitor. During the Cold War, we had never relied on the USSR for key inputs, and basically didn’t trade with them. Now, we would deeply integrate our technology and manufacturing with an enemy (and yes, the Chinese leaders saw and currently still see us as enemies).
The second choice was to reorganize the American defense industrial base, ripping out contracting rules and consolidating power into the hands of a small group of defense giants. In the early 1990s, as part of the ‘reinventing government’ initiative, the Clinton team sought to radically empower private contractors in the government procurement process. This new philosophy was most significant when it hit the military, a process led by William Perry.
The empowering of finance friendly giant contractors bent the bureaucracies towards only seeing global capital flows, not the flow of stuff or the ability to produce. This was already how most Clinton administration officials saw the world. They just assumed, wrongly, that stuff moves around the world without friction, and that American corporations operate in a magic fairy tale where practical problems are solved by finance and this thing called ‘the free market.’ In their Goldman, McKinsey and Boston Consulting Group-ified haze of elitist disdain for actually making and doing real things, they didn’t notice or care that the Chinese Communist Party was centralizing production in China. They just assumed that Chinese production was ‘the free market’ at work, instead of a carefully state-sponsored effort by Chinese bureaucrats to build strategic military and economic power.
Part of this myopia was straightforward racism, an inability to imagine that a non-white country could topple Western power. Part of it was greed, as Chinese money poured into the coffers of Bush-era and Clinton-era officials, as well as private equity barons. This spigot of cash continued through the Bush and Obama administrations.
In August of 1994, Bill Clinton’s Secretary of Commerce, Ron Brown, flew to China to try and seal two deals for American corporations. The first was to enable Chrysler the ability to build minivans in China, and the second was to get the Chinese to buy 40 MD-90 aircraft ‘Trunkliners” from McDonnell Douglas.
The McConnell Douglas deal was particularly important to the Clinton administration for a number of reasons. The company was dying; it was badly run by financiers who lacked an appreciation for quality production. More importantly, it had lost a key military contract for the F-22 in 1986, so the government felt an obligation to find customers to prop it up. There was also politics, with Bill Clinton trying to honor his unofficial 1992 campaign slogan, “it’s the economy, stupid.” Clinton would indeed hail the deal on the eve of the 1994 midterm election.
The Chinese agreed to buy the planes, but with one caveat. They wanted a side deal; McDonnell Douglas should sell a mysterious company called the China National Aero Technology Import and Export Corporation (CATIC) a set of specialist machine tools that shape and bend aircraft parts stashed in a factory in Columbus, Ohio.When Chinese representatives went to Columbus, Ohio, workers wouldn’t let them see the tools, because workers realized that they would lose their jobs if the tools were sold to the Chinese. The Chinese then sent a letter to the corporation saying that the deal for the Trunkliners was at a stalemate, but if the machine tools were sold to a mysterious Chinese company, well, that would have a “big influence” on whether McDonnell Douglas could close the deal on the planes.
It wasn’t just the workers who caused problems. The government could have been a hurdle for McDonnell Douglas as well, because these weren’t just any old machine tools. “According to military experts,” reported the New York Times, “the machines would enable the Chinese military to improve significantly the performance abilities -- speed, range and maneuverability -- of their aircraft. And if diverted, they could do the same for missiles and bombers.” Selling the tools wasn’t just a commercial deal, the machining equipment was subject to export controls for sensitive national security technology.
It was an insane idea, selling the Chinese government this important machining capacity. The Pentagon protested vehemently, as did Republican Congressman Tillie Fowler, who was on the Armed Services Committee. Fowler said allowing the transfer to reflects an ''emphasis on short-term gain at the expense of national security and long-term economic gain.'' And yet that’s what McDonnell Douglas sought, and what the Clinton administration pushed through. The Commerce Department cleared the deal, in return for a pledge (or behavioral remedy) that China would not use the tools to build missiles, but would dedicate them to a civilian aircraft machine tool center in Beijing.
McDonnell Douglas basically knew the behavioral remedies were fraudulent almost immediately; one of the most important pieces of equipment was shipped not to Beijing but directly to a Nanchang military plant. It wasn’t just McDonnell Douglas who understood the con; Clinton officials had the details of the deal, and let it go through anyway. Why? They used the same excuses we hear today - competitiveness and a fear of offending China. Here’s the NYT explaining what happened.
“American officials want to avoid sending any signals that would fuel China's belief that the United States is trying to ''contain'' China's power, militarily or economically. And they know that if they deny a range of industrial technology to China, other competitors -- chiefly France and Germany -- are ready to leap in and fill the void.”China never honored the overall deal. By 1999, China had acquired only one of the 20 promised Trunkliner airplanes. And three years later, the Federal government indicted McDonnell Douglas for “conspiracy, false statements and misrepresentations in connection with a 1994 export license to sell 13 pieces of machining equipment to China.” The government also went after the Chinese company.
Still, this was too little too late. The episode was by any metric catastrophic; the Chinese government got missile making machine tools in return for a promise they didn’t honor, which should have been a massive scandal, borderline treason. But ultimately it wasn’t a scandal, because Republicans, leading globalization thinkers, and Clinton Democrats decided that transferring missile technology to China didn’t matter.
Remember, during this entire period, Bill Clinton pressed aggressively to open up the U.S. industrial base to Chinese offshoring. And towards the end of the Clinton administration, McDonnell Douglas, as we all now know, later merged with Boeing, and that merger ended up destroying the capacity of Boeing - by then the sole American large civilian aircraft maker - to manufacture safe civilian planes.
How Bill Clinton Made the Worst Strategic Decisions in American History
Chinese power today is a result of a large number of incidents similar to this one, the wholesale transfer of knowhow, technology, and physical stuff from American communities to Chinese ones. And the confused politics of China is a result of the failure of the many policymaking elites who participated in such rancid episodes, and are embarrassed about it. As we peer at an ascendant and dangerous China, it makes sense to look back at how Clinton thought about the world, and why he would engage in such a foolish strategy.
Broadly speaking, there were two catastrophic decisions Clinton made in 1993 that ended up eroding the long-term American defense posture. The first was to radically break from the post-World War II trading system. This system was organized around free trade of goods and services among democratic nations, along with somewhat restricted financial capital flows. He did this by passing NAFTA, by bailing out Mexico and thus American banks, by creating the World Trade Organization, and by opening up the United States to China as deep commercial partners.
The Clinton framework gutted the ability of U.S. policymakers to protect industrial power, and empowered Wall Street and foreign officials to force the U.S. to export its industrial base abroad, in particular to China. The radicalism of the choice was in the intertwining of the U.S. industrial base with an autocratic strategic competitor. During the Cold War, we had never relied on the USSR for key inputs, and basically didn’t trade with them. Now, we would deeply integrate our technology and manufacturing with an enemy (and yes, the Chinese leaders saw and currently still see us as enemies).
The second choice was to reorganize the American defense industrial base, ripping out contracting rules and consolidating power into the hands of a small group of defense giants. In the early 1990s, as part of the ‘reinventing government’ initiative, the Clinton team sought to radically empower private contractors in the government procurement process. This new philosophy was most significant when it hit the military, a process led by William Perry.
In 1993, Defense Department official William Perry gathered CEOs of top defense contractors and told them that they would have to merge into larger entities because of reduced Cold War spending. “Consolidate or evaporate,” he said at what became known as “The Last Supper” in military lore. Former secretary of the Navy John Lehman noted, “industry leaders took the warning to heart.” They reduced the number of prime contractors from 16 to six; subcontractor mergers quadrupled from 1990 to 1998. They also loosened rules on sole source—i.e. monopoly—contracts, and slashed the Defense Logistics Agency, resulting in thousands of employees with deep knowledge of defense contracting leaving the public sector.Perry was a former merger specialist who fetishized expensive technology in weapons systems. But what Perry was doing was part of an overall political deal. In the 1980s, the Reagan administration radically raised defense spending. Democrats went along with the spending boost, on condition that they get to write the contracting rules. So while the Reagan build-up was big and corrupt, it was not unusually corrupt. When Clinton came into office, his team asked defense contractor how to make them happy in an environment of stagnant or reduced defense spending. The answer was simple. Raise their margins. The merger wave and sole source contracting was the result.
The empowering of finance friendly giant contractors bent the bureaucracies towards only seeing global capital flows, not the flow of stuff or the ability to produce. This was already how most Clinton administration officials saw the world. They just assumed, wrongly, that stuff moves around the world without friction, and that American corporations operate in a magic fairy tale where practical problems are solved by finance and this thing called ‘the free market.’ In their Goldman, McKinsey and Boston Consulting Group-ified haze of elitist disdain for actually making and doing real things, they didn’t notice or care that the Chinese Communist Party was centralizing production in China. They just assumed that Chinese production was ‘the free market’ at work, instead of a carefully state-sponsored effort by Chinese bureaucrats to build strategic military and economic power.
Part of this myopia was straightforward racism, an inability to imagine that a non-white country could topple Western power. Part of it was greed, as Chinese money poured into the coffers of Bush-era and Clinton-era officials, as well as private equity barons. This spigot of cash continued through the Bush and Obama administrations.
by Matt Stoller, BIG | Read more:
Image: uncredited
