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Removing Barriers to U.S.-India Defense Trade

Indian Defense Minister Manohar Parrikar and Defense Secretary Ash Carter listen during their joint news conference, Thursday, Dec. 10, 2015, at the Pentagon. (AP Photo/Cliff Owen)

The United States and India are on the cusp of translating a shared vision for the Indo-Pacific into tangible cooperation. Defense trade could prove an important catalyst.

The U.S. administration’s enthusiastic embrace of India as a bookend of stability in a free and open Indo-Pacific could very well translate into new defense trade deals. Secretary of State Rex Tillerson highlighted this potential in an October 2017 speech, stating the United States has offered India “a menu of defense options” to improve its capabilities. If past is prologue, U.S. firms should be strong contenders to provide several platforms on India’s military modernization wish list. India has purchased more than $15 billion in U.S. defense equipment in the past decade and, with plans to spend upward of $150 billion over the next ten to fifteen years, is actively considering American options.

Yet additional major American defense sales to India are far from assured. While U.S. firms have made remarkable inroads into the Indian market in the past decade and a half, bilateral defense trade has nevertheless failed to meet expectations. The United States and India are still motivated by different objectives, and their respective export and procurement policies reflect this. While the Indian procurement process poses challenges to nearly all foreign vendors, American firms face particularly difficult hurdles due to the unique nature of the U.S. system.

Existing bureaucratic barriers to trade are not insurmountable, but overcoming them will require a concerted political and bureaucratic effort to remedy disconnects between the two countries’ policies and procedures. Failure to do so would be a missed opportunity, as defense trade can be a particularly effective means of cementing this strategic partnership.

DIFFERING DEFENSE TRADE OBJECTIVES

The United States is the leading global exporter of arms, while India is the leading arms importer. Befitting their exceptional standings, the two countries have designed their own singularly complex systems of regulations and processes for arms sales and procurement. And those systems are in tension with one another because the defense trade objectives of the two countries—while similar—are not perfectly aligned.

The United States uses arms sales to enable closer partnerships and interoperability with its friends and allies. The overarching objective of U.S. arms exports is to build partners’ and allies’ capacity to defend themselves and—when appropriate—to facilitate their ability to operate alongside the U.S. military to address shared security challenges. The United States also leverages arms exports to maintain the U.S. industrial base and—through economies of scale—reduce costs to the U.S. armed forces. Washington takes into account several additional considerations for defense exports—particularly that such exports preserve the United States’ technological edge and support broader foreign policy objectives, such as human rights and regional stability—any one of which can trump interoperability and partnership goals. Indeed, this happened twenty years ago when Washington blocked arms sales to New Delhi following the latter’s 1998 nuclear test.

India, which has long endeavored to achieve self-sufficiency in manufacturing defense equipment, has developed an acquisitions process designed to transfer foreign technology and production lines to Indian soil with the twin goals of facilitating an indigenous defense industry and promoting job growth (the latter objective being consistent with Prime Minister Narendra Modi’s Make in India initiative). It has also sought to root out opportunities for corruption by issuing detailed, prescriptive procedures. The aim of the 2016 Defense Procurement Procedure (DPP)—the guidance document for all Indian defense acquisitions—is to enable India’s armed forces to acquire needed capabilities in a timely manner that fosters self-reliance, is transparent and accountable, and guarantees fair competition. To create a level playing field, the DPP prioritizes multivendor competitions over sole-source procurements as a way to minimize corruption and get more favorable pricing. India’s pursuit of self-reliance is also reflected in its defense offsets policy, which requires foreign vendors of high-cost contracts (approximately $300 million or greater) to invest 30 percent of the cost of the contract back in the Indian defense or aerospace sector.

Washington and New Delhi have taken some constructive steps in recent years to make the defense acquisitions process easier. India has raised its caps on foreign direct investment in domestic defense firms (from 26 percent to 49 percent ownership stakes), which makes it easier for foreign firms to enter into joint ventures with Indian companies. New Delhi also made slight modifications to its defense offsets policy to induce foreign investment in the defense sector, allowing offset requirements to be met through investment in the civilian aerospace sector in addition to the defense sector, to compensate for the latter’s limited absorptive capacity.

Meanwhile, the United States formally changed its export policy for India beginning in 2001, when then president George W. Bush’s administration lifted sanctions based on the determination that it was in the United States’ interest to facilitate the rise of a strong India. In the intervening years, Washington made several additional adjustments to export control policies to facilitate arms sales to New Delhi. Significantly, it transitioned from a presumption of denial posture—a policy that effectively blocked exports of sensitive military or dual use technologies to India without significant justification—to a general policy of approval for exports of most military technologies to India (provided they are not to be used in nuclear, missile, chemical, or biological weapons programs). The United States’ 2016 designation of India as a major defense partner, a classification unique to New Delhi, is indicative of India’s elevated status in U.S. export considerations. As a result of these efforts, American firms have successfully sold several high-end platforms to India since 2008, including P-8 maritime patrol aircraft, C-130 and C-17 transport aircraft, M777 howitzers, and Apache and Chinook helicopters.

PROCEDURAL AND POLICY DISCONNECTS

The string of recent American defense sales to India notwithstanding, persistent disconnects between U.S. and Indian defense trade objectives and the resultant misalignment of policies complicate—and could potentially stymie—bilateral defense trade. A review of five of the most significant obstacles demonstrates that these differences are not insurmountable, but worthy of dedicated attention.

Promoting Partnership and Interoperability

Whereas the U.S. government’s primary objective in pursuing defense trade with India is to reinforce the strategic partnership and promote interoperability, geostrategic considerations and operational partnering are notably absent from India’s DPP objectives and are not factored into its selection criteria. The DPP does make an allowance for a potential “procurement on strategic considerations” that would allow the Defense Ministry to purchase a defense platform without going through a multivendor competition in cases when strategic considerations are the primary factors guiding the decision.

But the bar for such decisions is prohibitively high and unlikely to be used outside of truly exceptional circumstances. A decision to bypass the normal procurement procedure can only be made by the Cabinet Committee on Security—whose members include the prime minister and national security adviser, as well as the ministers of defense, external affairs, finance, and home affairs—and then only after the Defense Procurement Board recommends doing so. That board is chaired by the defense minister and composed of senior military and career civil service officers with competing motivations. In a system with a history of corruption scandals, any recommendation by the Defense Procurement Board that circumvented normal procedures would have to be defended vigorously from inevitable accusations of foul play; this state of affairs reduces the likelihood such exceptions would be pursued.

Defense procurement by its very nature has geostrategic implications. The DPP should acknowledge this by factoring geostrategic considerations into routine procurement decisions as one of the standard selection assessment criteria, rather than continue to allow them to be weighed only in exceptional situations.

Optimizing Technology Transfer

Because India prioritizes technology transfer, it specifies the percentage of a given platform’s technology must be transferred as a procurement requirement when releasing a request for proposals (RFP)—the process that kicks off a multivendor defense competition. For American firms, two factors drive what they can offer India—U.S. government restrictions on technology transfer and profit. While the U.S government has demonstrated its intent to sell sophisticated platforms and transfer technology to India, there are some technologies it will not share with any country so it can maintain its competitive edge. There also may be circumstances in which the U.S. government is comfortable sharing sensitive technology with India, but U.S. firms find it does not make good business sense to transfer ownership rights or know-how. American firms that cannot meet the technology transfer requirements of an RFP in a commercially viable way choose not to compete, closing off an opportunity for cooperation.

Adding to the complexity of private sector decisionmaking is India’s new strategic partnership concept—incorporated into the DPP in 2017—which paves the way for certain Indian private firms to develop a domestic private defense sector. The strategic partnership concept requires foreign firms to partner with select domestic companies, an arrangement that introduces questions of ownership rights and control over proprietary technology. To foster an environment conducive to defense cooperation with foreign vendors, it will be important for India to base its technology transfer requirements on realistic assessments of the sensitivity of the technology desired and the strength of the business case for moving that technology to India.

Securing Sensitive Technology

Washington’s willingness to share sensitive technology with a partner country depends upon whether the country’s government provides assurances the technology will be protected to U.S. standards. This practice is mirrored in cooperation between the U.S. government and domestic private sector firms. U.S. private industry follows U.S. governmental security protocols for handling classified military information. Critically, as India looks to spur private domestic firms to engage in defense manufacturing and development, it is putting in place standard operating procedures and an oversight system for private companies to manage classified military information. New Delhi must conclude a governmental agreement with Washington regarding private sector security practices before U.S. private sector entities can engage Indian counterparts in the development or manufacture of sensitive technologies.

India would be unwise to dismiss U.S. demands for these formal assurances as unnecessary bureaucratic steps. As the Indian defense manufacturing sector shifts from a monopoly of public sector enterprises to genuine engagement by the private sector—a significant paradigm shift—it is in India’s own interest to guard against proliferation or theft of its most sensitive classified military information.

Assessing Lowest Cost or Best Value

The DPP deliberately favors the lowest-cost bid among submitted offers deemed compliant with DPP criteria. This preference is driven in part by fears of corruption, the logic being that smaller bids make the potential misuse of funds less lucrative.

Using lowest cost as the determining factor in DPP decisions creates a disincentive to firms to offer any more than the bare minimum technology required by India’s request for proposals simply because more sophisticated technology tends to cost more. This is the case even if, for example, an American firm (and, by extension, the U.S. government) would be willing to offer a greater percentage of technology transfer, or a higher level of technology than specified in the RFP that would ultimately benefit India. The DPP tries to compensate for this scenario by giving a fixed number of extra points to bids that offer extra technology, but it does so without any apparent qualitative assessment of the extra technology that is offered. This approach fails to capture other advantages of an offer that might not be specified in RFP requirements, such as the potential of partnering with a given U.S. firm on third country exports, access to the global supply chains of U.S. defense firms, and future collaborative research and development opportunities that would build from this cooperation. The DPP’s deliberate avoidance of qualitative or potentially subjective criteria reflects a desire to fool-proof a system managed by relatively inexpert officials, since India lacks a dedicated acquisition cadre.

India’s preference for lowest cost bids stands in contrast to the U.S. acquisition model. The Department of Defense, when running an acquisition contract competition, may select a vendor based on the best value to government, even if that vendor does not offer the lowest price. Decisionmakers—from a cadre of acquisition professionals—must justify their best-value decision, but this approach gives them some flexibility to assess and factor in the value of offers that perhaps would not been captured in the RFP but would be beneficial to the United States.

Meeting Technical Timelines

At the most granular level, Indian DPP and the technical requirements of U.S. arms export controls are mismatched, making it nearly impossible for U.S. vendors to meet DPP criteria. The most glaring example is the tight timeline for responding to Indian requests for proposals. Per the DPP, once an RFP is issued, firms have ninety days to respond with their bids. U.S. firms cannot respond until they have received U.S. government validation through the licensing review process, which—for exports of sensitive technology—exceeds India’s required timeline.

U.S. firms and the U.S. government have come up with some creative, but inefficient, work-arounds, such as conducting preliminary interagency license reviews before the RFP is issued. However, this poses several risks. If RFP technology requirements change after those preliminary reviews, U.S. firms are hard-pressed to meet the deadline. Additionally, to expedite licensing reviews before seeing an actual RFP, U.S. companies may conservatively request licensing permission from the U.S. government for less sophisticated technologies that would necessitate shorter review periods. In such cases, U.S. firms may offer less capable technology than they or the U.S. government would be inclined to provide otherwise, because selling more sophisticated—and therefore sensitive—technology could require a longer review that would disadvantage such American bids due to time constraints.

BRIDGING THE GAPS

The United States and India should not allow the aforementioned bureaucratic obstacles to prevent the cooperation they both seek. Where possible, each should take concrete steps to modify existing policies to help ease bilateral trade. The preponderance of the recommendations below is directed at India, since countries making procurements largely dictate the terms for defense trade.

Recommendations for the United States

Ease some technology transfer controls. While the U.S. government has demonstrated a willingness to export technology to India at a level consistent with what Washington offers to its closest allies and partners, the United States is, on the whole, often conservative when it comes to technology transfers. The U.S. government, recognizing that domestic defense firms are operating in an increasingly competitive global market, should consider easing some export controls. It could, for example, allow the transfer of technologies that were once under the sole purview of the United States but are now being sold by other international competitors.

Front-load licensing decisions. The U.S. government should continue to conduct licensing and technology reviews in advance of an Indian RFP release. While this goes against standard U.S. procedure, it is the only way to ensure U.S. firms can compete under existing DPP timelines. Admittedly, this is an imperfect and manpower-intensive work-around, as there is no way to ensure precisely what will be requested until an RFP is released. But in practical terms, there are many ways to do this—from continuing ad hoc arrangements to developing formal review mechanisms.

Recommendations for India

Set realistic technology transfer expectations. India should factor market considerations into its technology transfer requirements for an RFP—including the availability and number of producers of a desired technology, for example—to determine how the transfer of a given technology could be commercially viable for the producers.

Conclude a governmental agreement regarding private sector handling of classified military information. The Indian government should sign an agreement with the U.S. government asserting its private firms will adhere to its government security standards.

Create best-value-for-government criteria for defense acquisitions. India ought to allow RFP selections to be based on best-value-for-government determinations that would consider a number of factors, not just lowest price. Additional criteria that could be factored into a final recommendation include: geostrategic considerations, the significance of technology transfer offered, and global export opportunities.

Lengthen request for proposal response timelines. India ought to extend RFP response timelines to account for U.S. licensing requirements. This would not necessarily impact overall procurement timelines if India concurrently streamlined the RFP development process.

CONCLUSION

The United States and India are on the cusp of translating a shared vision for the Indo-Pacific into tangible cooperation—with defense trade serving as an important catalyst. India’s military modernization plan could potentially drive closer engagement with the United States through combined training on shared platforms and future joint ventures between U.S. and Indian defense firms.

The promise of cooperation spurred by defense trade is challenged by the two countries’ different procedural approaches and compounded by complacency within their respective bureaucracies that past successes will lead to future sales. Still, the United States and India do not have to change their overarching objectives with regard to defense trade. They must, however, make procedural changes to their respective policies to ensure bilateral defense trade and technology cooperation proceed apace. To do so will require political level attention in both capitals to override the inevitable bureaucratic resistance and inertia.

The views expressed herein are the author’s own and do not necessarily represent those of the Department of Defense or the U.S. government.

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