AIA’s Luddy on Trump Administration’s ‘Mines to Magnets’ Rare Earths Plan, Industrial Policy, Tariffs

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John Luddy, the vice president for national security policy at the Aerospace Industries Association, discusses the Trump administration’s “mines to magnets” effort to safeguard access to rare earth elements vital to national security — the Air Force Research Lab last week issued a request for information for sintered neodymium iron boride rare earth permanent magnets — defense industrial policy and implications of tariffs with Defense and & Aerospace Report Editor Vago Muradian.

Vago Muradian:  Welcome to the Defense and Aerospace Report.  I’m Vago Muradian here at the Aerospace Industries Association Headquarters in Northern Virginia to talk to John Luddy, the Vice President for National Security Policy here at AIA.  John, thanks for the time.

John Luddy: It’s a pleasure to be here with you.

Mr. Muradian:  Obviously AIA is very, very focused on industrial policy including increasingly considering what kind of industrial strategies the nation might need.  Obviously the U.S.-China trade war has prompted Beijing to threaten to cut the United States off from rare earth elements which are critical to micro-electronics.  The Obama administration started a process to try to increase stockpiles and look at alternate sources after Beijing cut off Tokyo a few years ago.  Two days ago, and we’re taping this on Friday, May 31, two days ago the Air Force Research Lab put out a Request for Information, a little bit part of the administration’s drive to go from mines to magnets, looking for centered neodymium iron boride rare earth permanent magnets.  I just wanted to say centered neodymium iron boride, which I think is cool.

Talk to us a little bit about that initiative and how it fits more broadly into you think the industrial base focus that this new administration has, and you guys put a report out just a little while ago on that as well.

Mr. Luddy:  We did.  About a year ago we put out a report that looked really at analyzing the administration’s Executive Order 13806 on the National Security Industrial Base.  We looked at a number of things, everything from the state of budgets to the policies within DoD for procuring, for acquisition and procurement of capabilities.  And included some discussion of the concerns we have about specific capabilities and specific components that are part of our industrial base.  I think this example kind of plays right into that.

There are going to be more like this where we as a nation start to see where our vulnerabilities are and what we need to do to protect ourselves from them.  Generally I think the expectation has been over the years that open trade with China would prevent some of these problems from occurring. I think we’re realizing now as the broader U.S.-China relationship changes that that may not be something we can count on.

So as a national security concern we have to have a way to secure the availability of these kinds of capabilities, and I think this is the first example, perhaps, of taking a specific capability, but I do think it’s typical of the kind of thing we’re going to have to do going forward.

Mr. Muradian:  You spent a long time up on the Hill.  You were part of the legislative office early in the Bush administration if I recall correctly.

Mr. Luddy:  Correct.

Mr. Muradian:  And historically we’ve had a very, or the government has had a pretty laissez faire, particularly after the end of the Cold War, approach to industry does what it does, it provides our industry, the free market, let’s let the free markets work and a little bit of a reluctance to put that kind of investment in specific strategy and policy.  Do you see a changing appetite both on the part of the industrial base but also of lawmakers to say hey look, to protect some of these capabilities there’s a national investment that we’ll have to make at the end of the day.

Mr. Luddy:  Look, I think it’s a matter of balance.  We certainly think that the best way to get the best capability to our warfighters is to use the free market system.  It’s proven itself over the years.  There are things where there’s not an economic case, where we don’t naturally, through the course of the economy and economic forces, arrive at the capability that we need or the components or materials that we need.  This is one of those cases.  Some of these rare earths are not going to be sustained by our economy more broadly, so we may need to look at, from a defense standpoint, having stockpiles, having investment in domestic capabilities, things that you wouldn’t ordinarily sustain in a pure free market.  If we have to do that to get the capability to the warfighter, we have to do it.

Mr. Muradian:  Let me ask you a little bit about tariffs.  The President has been looking at tariffs in order to drive change, whether it’s with China, whether it’s been with Canada or even other allies around the world.  He looks at it as a means to get to a better end, in his view a fairer end.  Now we have over immigration some very, very strong tariffs that are being imposed on Mexico.  As we tape this I don’t think there’s any determination, and I’m not even sure there’s been a response, a full response from the Mexican side.  But Mexico, like Canada, are critical elements of the U.S. industrial base, whether for aerospace components as well as for defense components.

What are the potential implications here ultimately for the industrial base?  And ultimately for the Pentagon which is a consumer, right? We ultimately as taxpayers are the consumer of these products.

Mr. Luddy:  Look, we believe in free and fair trade, and I think that needs to be the objective of anything that takes place right now.  But as I said, as we move and try to make sure we maintain the capabilities that we need, we may have to have alternate policies that get us through a period where there’s constraints on trade.  And whether that’s with Mexico and some production capability there, or China and raw materials, or Canada and raw materials, however that plays out the most important thing from our perspective is to be able to produce what we need to have. And again, that may require more things like what the Air Force is doing in this case, securing access to the resources that we need to make what we need.

Mr. Muradian:  Let me ask you on the budget.  The budget process is moving its way forward.  I know you’ve got your eyes focused on that.  What are some of your concerns as this process unfolds?  Every expert we talk to, including members, say hey look, this is going to be a messy process, but ultimately we’re going to get it right.  But now there’s a little bit of a concern we might have to return to a CR.  There are debt ceiling increases; there are worries about whether impeachment talk is going to derail the train somehow as well. How do you see this landscape forming up and how soon do you think we’re going to have a deal that lifts spending caps and gets us to at least some form of regular order in a process that does seem, as you look at it now, somewhat disorderly?

Mr. Luddy:  I can tell you what we’d like to see.  We’d like to see another two-year deal that gets us to the remainder of the Budget Control Act.  We saw that for the last two years, that worked very, very well.  It gave us a lot of stability both for the DoD and their budget planning and for our industry and planning around that to meet the requirements that the Department of Defense puts on us.  That’s what we’d like to see.

The backstop of the debt ceiling was driving that, and that I believe was going to be sometime in the September timeframe.  It now appears that that backstop is moving out just because of broader economic factors.

We want to see that two-year deal.  We want to see some stability.  We talked a minute ago about the industrial base assessment that was done and that we looked at.  The first and foremost concern for our industrial base is robust balance, sustained spending, predictable budgets.  We can’t run our industry properly when we get all kinds of mixed signals on how programs are going to unfold.

So this is an industrial base issue, too.  The budget issue.

Mr. Muradian:  Let me ask you one last question, and that’s sort of the balance.  As I said, during the Cold War, much more active industrial planning on the part of the government.  Contractors sort of understood that and went along with it.  Then we went to hey, budgets are dropping, let’s try to be efficient, let’s let free markets handle some of this stuff.  I think there was an acknowledgement it went a little bit too far to vest even requirements and stuff into industry. Now some of that’s been pulled back under the guise of hey, we are the guys who should be making some of these make/buy decisions.

Ultimately as you talk to your membership, both very, very big companies and including smaller ones, is there any consensus that’s emerging about the kind of balance between how directive the system should be and how much free market — if there was going to be an industrial strategy or policy, have you guys been talking about what the right touch and approach to that should be?

Mr. Luddy:  In general, I think it should be minimal.  We should have a much as possible clear requirements from DoD, a clear understanding of what the threats are that the department is trying to manage and what the services and warfighters are trying to build toward, sustained funding.

We do a very good job of reading our customer.  We do an excellent job of matching our production, our capabilities to what our customer asks of us.  If we can get clear signals on that I think we can do very well.

Now we’re talking today about something where there isn’t necessarily that market case, where we’re almost on an emergency basis having to have capabilities.  That’s a different matter.

But by and large I think if we can get to steady and predictable funding at the right levels and a really good understanding between the warfighter on the one end and our industry on the other as to what DoD wants to produce and what problems DoD is trying to solve out in the world, I think we can manage that very well.  We’ve shown ourselves as an industry over time to be very, very good at meeting requirements and adapting to different kinds of economic and geopolitical conditions.

Mr. Muradian:  And are you satisfied with the dialogue between you and the department?  Ellen Lord, Al Schaeffer, Dr. Griffin?

Mr. Luddy:  We are, very much.  We’ve enjoyed I think in the last few years in particular an excellent level of dialogue. We not only meet from our CEO level to the principals in the department, but all through the chain of command in OSD and in the services.  We have a good ability to reach out.  We get consulted and asked a lot about what we think on various kinds of issues.  We’re deeply involved, for example in the cyber security policy development in DoD.

So I think by and large, it’s very, very good.  Not always. And there are times where DoD needs to do things, perhaps, where they can’t bring industry in on the front end, but we think there’s less of that than there has been in the past, and generally speaking we feel pretty good about our ability to communicate with the leadership there.

Mr. Muradian:  You mentioned cyber, and I should say that the centered neodymium iron boride issue is part of Title 3, right?  We should say that from — The National Defense Production Act, right?

Mr. Luddy:  Right.  The Defense Production Act.

Mr. Muradian:  Let me ask you about cyber, one last question.  The Baltimore hack is obviously the latest in a long series of breaches, whether it was at OPM, but it has affected rather dramatically a major city not very far from Washington, and a major city that’s decided it’s not going to pay that $100,000 Bitcoin ransom that those who locked up the city’s computers have demanded.

Does this highlight for you, and does the nation need to have a better and more integrated view of cyber strategy and cyber security at the end of the day from an AIA and from an industry perspective?

Mr. Luddy:  No.  I don’t think this changes anything because I believe for the last couple of years we’ve been really aggressively working with DoD to improve cyber security.  It’s something we have a shared interest in. Our companies have no advantage in being vulnerable from a cyber standpoint.  We’ve worked really hard across the levels of our industry to have the prime contractors help the middle and lower tiers in their supply chains because more secure. We’ve tried to develop a system where we have different ways of measuring that threat-based cyber security that can really respond to the dynamic cyber threats.

So I don’t think this adds any extra energy to that.  We’ve been working on it really hard, and I’m pleased with the fact that our industry has come together around the National Aerospace Standard 9933 that we put together, and increasingly, the department is looking at that as a model for some of its approach to having an industry-wide and really DoD ecosystem wide standard approach to cyber security.  I think we’re all fully engaged in this.  This is probably the issue we talk about most, frankly, with DoD.

Mr. Muradian:  John Luddy, the Vice President for National Security Policy here at the Aerospace Industries Association.  John, thanks very much.  I really appreciate it.

Mr. Luddy:  You bet.  Glad to have you here.  Thanks.

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