Buy American or Else: The Downside of Domestic-Source Rules in Procurement
Domestic-source restrictions on key military materials are well-intentioned, since they're designed to maintain a U.S. industrial base capable of producing things like titanium, magnesium and even rubies. But they've got a big downside, in that they can drive up costs and even hamper weapons production.
Add one more problem: They can drive suppliers to fraud.
Last Friday, the Department of Justice announced the arrests of nine people for allegedly importing Chinese magnesium and making anti-missile flares with them. They delivered the products to the Department of Defense under a $42 million dollar contract. The flares are used by helicopters and aircraft to spoof infrared guided missiles with bursts of intense light and heat. Magnesium is a key ingredient in such flares, as it burns brightly at high temperatures.
Those involved face charges of violating procurement laws and for falsely labeling the products "Made in the USA," which allowed them to avoid import and custom duties. Wire fraud and anti-dumping charges are also part of the mix.
The basic problem is that U.S. suppliers of key materials are often more expensive than their overseas counterparts. Reliance on them can cut against U.S. efforts to reduce the cost of procuring weapons and related equipment.
Similarly, domestic-procurement rules cause problems for companies like Boeing (BA) also face higher costs , which makes commercial jetliners that can use titanium from any source but also aircraft like the F/A-18 Hornet which cannot. That forces Boeing to maintain two supply chains, which in turns boosts costs further since it can't get the same quantity discounts it might if it combined the production-line requirements.
Again, the goal of the rules is a worthy one, since the U.S. needs to maintain an effective supply of important materials -- without them, China, Russia or other foreign producers could cut off deliveries. In the two world wars, Germany was dependent on certain key metals from overseas, allowing the Allies to blockade delivery, hampering weapons and ammunition production.
Unfortunately for the U.S., China currently produces 89 percent of the world's magnesium and has been the leader in production since 1998.
In times of stable foreign supply, it makes sense to use it while stockpiling the U.S.-produced material. While there is a Defense National Stockpile of these commodities, under orders from Congress it's been aggressively reducing its holdings by selling stockpiles on the open market since 1992.