AIA’s Fanning: Trump’s Proposed Steel, Aluminum Tariffs Risk Foreign Retaliation

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Eric Fanning, president and CEO of the Aerospace Industries Association, and former US Army Secretary, says President Donald Trump’s proposed steel and aluminum tariffs risk inviting foreign retaliation because the US “aerospace and defense industry” depends on exports, and such blowback would “really dry up the market for some of these products” and inflate prices for US consumers during a wide-ranging, March 8, 2018, interview with Defense & Aerospace Report Editor Vago Muradian. Fanning also discusses funding for the US Defense Department and NASA, and his priorities at AIA in the interview, which was conducted at the association’s headquarters in Arlington, Virginia. Read the full interview transcript below:

Vago Muradian: Welcome to the Defense & Aerospace Report. I’m Vago Muradian here in Northern Virginia where we’re at the Aerospace Industries Association headquarters to talk to the new president and CEO of the Aerospace Industries Association Eric Fanning. Eric, congratulations again on your ascendancy, and thanks very much for the time.

Eric Fanning: My pleasure. It’s good to be with you.

Vago Muradian: So you, you know, had a distinguished career during the Obama administration and the Pentagon holding senior [US] Navy jobs, [US] Air Force jobs, then, eventually, Secretary of the [US] Army and, obviously, chief of staff for a while there for [former US Defense] Secretary [Ash] Carter. Talk to us a little bit. You know, you’ve come out very, very strong representing your membership against the tariffs that the Trump administration has proposed. The president wants to impose a 25 percent tariff on steel imports, a 10 percent tariff on aluminum imports. You’ve come out very strongly. Why, in your view, is that a bad idea, not just for U.S. industry, but for national security?

Eric Fanning: Well, we’re concerned about the effect on the supply chain: (a) what it does to cost, which ultimately passes on to the customer, and (b) what it can do just for disruption if our supply-chain companies have to find new sources of steel and aluminum during this transition. This confusion could slow things down. That ultimately ends up in more cost, as well.

But the real concern we have is retaliation. The aerospace and defense industry is the largest contributor in the manufacturing sector to our trade surplus — $86 billion a year. It’s dependent on exports and if foreign countries, many of whom are our allies,  decide to retaliate against these tariffs it could really dry up the market for some of these products and, again, then raise prices for us here at home.

Vago Muradian: You also represent — You know, everybody looks at AIA, and you know when you walk in there were a lot of military models there. There is, even, because HII [Huntington Ingalls Industries], because of a historical quirk, Huntington Ingalls Industries is also a member. And there’s a model of the Gerald R. Ford the new or newest aircraft carrier in the Navy.

Vago Muradian: And that’s right. That’s right. It does have planes on it. Well done. But you also represent the commercial aircraft industry and that’s actually the largest chunk of the industry is those who are supplying Boeing and Gulfstream. Talk to us a little bit about the commercial impact that you’re concerned about, as well, here.

Eric Fanning: So, it’s also space — space, civilian aviation, DoD —  on the commercial side. On the defense side, aluminum and steel are sourced domestically. On the commercial side, they go where they can get the best prices, the materials that they need, in order to pass… this on to their customers. So for the supply chain and for cost there’s probably more risk on that side.

But same thing in terms of … exports. The real risk for us is retaliation. If we do this in a blanket way to countries, most of whom in the top five are close allies, we risk retaliation on the other end for jobs, for products that are going outside of the country. We represent two point four million American workers, American jobs. They’re being paid in our industry twice what the national average is. And they’re at risk if there is retaliation from other countries that prevent these exports from leaving the United States.

Vago Muradian: We’ve seen some of our closest allies express their displeasure with this, whether directly to the president or, certainly, to his team. We have had lawmakers — the House Speaker [Rep. Paul Ryan, R-Wis.] has voiced his ill ease with this. But the president has made clear, you know, even the departure of his economic chairman of his council of economic advisers, Gary Cohn, you know, left over this issue. But the president is still very much committed to making good on this campaign promise. There’s a little bit of talk of maybe waving for Canada and Mexico. Tell us how you think this is going to play out. Where are we eventually going to end? Because I think there is [sic] a lot of people on both sides of the Atlantic, and markets are very jittery seeing a trade war coming.

Eric Fanning: I don’t think I could begin to predict where this is gonna end up and what’s gonna happen, but I think we ought to fight it now. The last time this happened in 2002 studies showed that more jobs in the economy were lost overall than existed entirely in the steel industry and there’s already analysis out there now showing how many jobs in the broader economy are at risk. Most of the jobs in the United States in steel and in aluminum are downstream using something from the steel and aluminum that’s produced. And if there’s less of it, if it’s more expensive, all those jobs — including aerospace and defense — are at risk.

Vago Muradian: You were in the Pentagon at a time when operations in Afghanistan and Iraq were ongoing and there were a number of foreign systems that we benefitted from Israeli armor for example the MRAP was a foreign vehicle at base. Are you concerned at all about some of the alliance implications of that given that we now really have a globally sourced defense industrial base that draws technologies from all over the world. Materials from all over the world especially for certain specialty items that our allies tend to do well that we’ve incorporated and I mean [the] Joint Strike Fighter couldn’t happen if it wasn’t for this global team that’s led by Lockheed Martin, just an extraordinary array of companies and technologies. How concerned are you about the alliance implications for this at a time when you know the United States needs as many allies… as it can get?

Eric Fanning: Well, you’re right. First of all, the supply chain from raw materials all the way through manufactured goods is international. It’s intertwined. It’s impossible to unwind that at this point — not that we’d want to because those alliances are really important. And, so, when someone makes the argument that we need to do this for national security reasons despite the Pentagon saying that only three percent of the domestic output goes into the defense sector and all that being sourced domestically, it is a concern because I think this is going to have negative repercussions on alliances, on relationships, on trust in the United States, and is gonna disrupt that supply chain that is global, is international and is based on allies all over the world.

Vago Muradian: One of the — Now to a happier subject,  which is tax cuts. You know, you guys played a role in that debate. You advocated for that. That was something very important for your membership. But there were those on Wall Street who look at this and say, “look, you know, we fear that, as opposed to it being reinvested, a lot of this is gonna go for dividends, for buybacks and also for executive compensation,” which has been something that’s been on the rise. From your standpoint, you know, you’re talking to the leadership of all the companies. Talk to us about what… you’re hearing on that, the importance of the tax cut and how beneficial, you know, everybody hopes that it will be.

Eric Fanning: Well we’re already seeing companies across the industry invest in their workers with raises and bonuses, invest in training, invest in their facilities and plants. This is an industry that can’t not invest in its future. This is we are the dominant industry of the world in aerospace and defense, and they know they’ve got to keep it that way. And, for them, this is an amazing opportunity to take some of this money from this tax break and invest in the future, in R&D [research and development] and advanced technologies.

Vago Muradian: And, from your standpoint, you know, that’s what you’re seeing.

Eric Fanning: That is what we’re seeing, and you’ll see more of that. There’s no way that they can stay competitive with what’s going on in the global marketplace without finding those funds to invest in next-generation platforms, equipment, technology.

Vago Muradian: I was gonna get specific on companies, but you speak for the whole industry as opposed to specific companies.  So, let me ask you this question… there were a lot of folks — [Rep.] Adam Smith [D-Wash., ranking member of the House Armed Services Committee] being one of them — but also Republican members that fear that there’s a two-year funding window. You know, we just came from CNAS [the Center for a New American Security think tank], where we talked to Susanna Blume, who worked for [former] Deputy [Defense] Secretary [Bob] Work, one of your colleagues who was saying “look, you know, if you just add up the numbers, even the Pentagon comptroller has admitted that the defense budget goes up by two percent, but its internal costs are growing, and so the $40 billion increase that we’re seeing is not something that… the department is likely to be able to absorb that quickly, but that the funding window of up is a very small funding window.” Is that a concern for you? First question.

Second, follow-up question is, what are some of the things you guys are going to do to help drive that message home for more spending, more sustained spending over a more prolonged period of time? ‘Cause everybody’s concerned, you know, hey, you know, the deficit’s catching up with us as well.

Eric Fanning: Well you you’ve touched on a number of big issues. The first is I think there has to be some flexibility in spending, and you’re seeing Congress talk about a little bit more for DoD to try and absorb the ’18 numbers that were given halfway through ’18. That’s gonna result in very inefficient spending if there isn’t some flexibility provided.

We’re glad to see the extra investment,  asking the military to do what it’s doing today needed more investment, but it’s part of a larger picture of getting back to regular order so there is some predictability in how it’s budgeted, when it’s budgeted, the budget bills are passed, appropriations are passed on time so they can be planned around. So that’s the first thing. The extra money is good. More stability in the process is important, or you’re just not going to get your bang for the buck out of extra money that’s coming.

But it is a real concern for ours that what happens in two years when this budget agreement is up. We’re still in sequestration, and are they going to be able to find a deal to keep the spending level going, or is it pulling the rug out of the military that’s now starting to plan around these numbers? And how we get added is just continuing to draw attention to it and showing how inefficient the system has been the last few years without budgets being passed on time, with continuing resolutions showing how expensive that is, what it costs the military, and then showing what will happen is if there’s a precipitous drop in spending in two years time.

Vago Muradian: Are you optimistic of some of the acquisition reforms things that you’re seeing?  Obviously, you know, your administration worked very hard. [Former Under Secretary of Defense for Acquisitions, Technology and Logistics] Frank Kendall worked very hard. The entire team worked hard to try to bring, to reduce program costs, and it was empirically proven that that happened. Then there were changes in the law, and the services have gained a lot more acquisition authority. What’s the sense of these reforms you’ve been working and your team, and the CEOs have been working with Deputy [Defense] Secretary [Patrick] Shanahan, in particular, but as well with [Ellen Lord and, with Eric Chewning, the manufacturing industrial base policy deputy assistant secretary? Talk to us a little bit about the perception of whether or not these acquisition reforms are on track to deliver the kind of savings and speed and agility that everybody wants to see from the system.

There’s a lot of optimism, but these are a lot of reforms piled on each other at the same time. It’s gonna take the Department of Defense some time to really implement those and realize the full benefit of them, but I think everybody believes that there is a lot more work to be done in acquisition reform. They believe it in industry, they clearly believe it on the Hill and they definitely believe in the Pentagon, as well, so I think the optimism comes (a) from the belief we need to do more and more is being done but it’s being done in a pretty collaborative way currently and as it was in the past.

Vago Muradian: Your predecessor was Dave Melcher, a retired US Army lieutenant general, in that you have common — He has one of the coolest football helmets ever here, by the way. I just want to point this out. When Navy’s reign came to an end — a cadet was wearing this helmet when it all ended for Navy. You want to talk a little bit about that?

Eric Fanning: Well, they asked — You know, I had the privilege of being secretary of the Army when that streak came to a close and Army won, and as I was leaving, they said, “what do you want?” They have all these sort of traditional things, maybe they like to give you a reproduction of George Washington doing something, but I said I wanted one of these helmets because this was the, I think, the coolest uniform of any college or professional team that year and also the year that they beat Navy.

Vago Muradian: That’s right. And they repeated it a year–

Eric Fanning: The first year in what will be a long streak, by the way.

Vago Muradian: Yes. Well from a Navy fans — Navy fans would say may their reign be benevolent, but brief, but enough about the helmet. And you know your predecessor you know deeply respected as I said Dave Melcher a West Point graduate you know lead ITT and then lead AIA and has a well-deserved retirement. But now you’ve stepped into the breach. Talk to us, you know, about some, you know, your vision your priorities.

You know you’ve always put, you know, in all of the jobs in all the years that I’ve covered you have always been about driving innovation. Talk to us a little bit about what your priorities are, where do you want to see AIA go, grow, change, develop, take on new issues. Bring us up to speed on what you’re thinking is.

Eric Fanning: Well, I’ve come to think of AIA’s priorities as three — good number of course. The first is investment, making sure that the Department of Defense has the funds its [sic] needs for our nation’s security, the FAA [Federal Aviation Administration] is fully funded so that civilian aviation remains safe, and NASA — NASA’s funded for exploration and for science.

Second is engagement. A big part of what AIA does is actually behind the scenes, convening industry and government to figure out the rules and regulations and processes that we need for our industry.

Third is competitiveness. When American companies compete internationally, they’re competing against foreign governments, and so we need to make sure that there’s a fair and level playing field, and when there is, our products are always going to win.

Those three things have to be built on an innovative workforce that we’ve had historically. We’re going into the centennial next year for AIA, and that that’ll be a big focus of us because industry leaders, CEOs are very concerned about being able to make sure they can maintain the workforce they have today into the future which requires us to keep investing in STEM and…offering opportunities for kids to get them excited about going into these types of jobs.

Vago Muradian: Well, and talk to us a little bit about it, because when you and I have talked about it, you know, the whole key has been how to get kids to get attracted and to stay attracted to the industry because some of this is being seen as a little bit blasé, right? What are some ways and what are some techniques you guys do that great rocketry challenge every year. But what are some other things that you’re exploring, especially with your membership, to try to reach out there? You know Raytheon had the extraordinary Math Moves You program, has the exhibit at Disney. Each one of the companies has been working on this, but, you know, are these the right mechanisms to try to get where we need to be?

Eric Fanning: There’s no one mechanism that’s going to get there. We need to do as much as we possibly can, and companies in this industry do a lot. A lot of it is state and local because that’s where education is controlled. It’s providing opportunities, providing the right training, linking up your facilities with local schools, and showing that there is a path to a job.

But as one of my members said, you can’t inspire without doing inspiring things, and we find that a lot of things in this industry inspire kids. The thing more than anything that gets third and fourth graders excited about science, about STEM, is our NASA program, so that’s one reason that we really fight hard for investment there and for what NASA does to educate because we’re finding that there are inflection points early in the age of someone — third grade, fourth grade, certainly by sixth or seventh — where we lose a lot of people going into STEM and only half of people who enter college thinking STEM is going to be a career actually graduate with that as their degree. And so it’s really making sure that we show the country, especially the youth of the country, what it is that the members, that the companies in this association are doing.

Vago Muradian: The administration has proposed privatizing the air-traffic control system that got a lot of pushback from municipal airports. You know there was a proposal to sell National, Reagan National, Reagan Washington National, I should say, and then Dulles Airport, as well. A lot of pushback from local authorities. You have a mixed membership on this. Where’s the right place for the nation to end up when it comes to air-traffic control modernization that is key, given that the complexity of running such a vast air-transport system depends on extreme precision in how you’re managing around weather. You know, what’s the right place for the nation to end up from AIA’s perspective?

Eric Fanning: Well, the starting point is safety, which is FAA’s priority and is what we always say is the most important thing about civilian aviation — that it maintain safety as its primary goal. We support the funding of next-gen  because it’s the path that we’re on right now, and even if they move towards privatization, this is technology that we’re going to need in the future to continue making sure that it’s safe and to make it more efficient.

Vago Muradian: And a final question on NASA. You know, you said about how important that is. You know, Elon Musk grabbed headlines when the Falcon Heavy took off and he shot a car of his own making into space with a dummy wearing his own space suit with — and anybody who is a Hitchhiker’s Guide to the Galaxy fan, you know, it had “don’t panic” on the on the instrument panel —  even though the airplane is not… the car is not in the right orbit.

But are you concerned about NASA’s funding and the program that NASA has to continue to inspire younger generations? I got inspired by the Apollo program when I was a kid. I remember the moon landing, and it was still, to this day, the coolest thing ever. NASA hasn’t been doing stuff like that to really attract people. Do you think that the plan that’s been proposed by the administration is the plan that’s going to grab people’s attention and keep it?

Eric Fanning: Well I do think exploration is an important part of NASA. You talked about the Apollo program there was a spike in STEM Ph.D.s during that period, again, ’cause it inspires people, so we do want to see exploration properly invest in NASA, but we also — not at the expense of science, at the expense of weather satellites, expense of a number of things that are in the NASA budget, including a budget to help educate children about what NASA is doing and that link is really important there are fewer things that inspire kids to go into STEM than what NASA is doing particularly on the exploration side.

Vago Muradian: Eric Fanning, presidency over the Aerospace Industries Association, thanks very much.

Eric Fanning: Good to see you.

Vago Muradian: Welcome aboard, and thanks very much for the time.

Eric Fanning: Thanks. My pleasure. Good to see you again.

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