Taiwan and US 'Crown Jewels'

MCDONNELL Douglas's announcement that it intends to sell 40 percent of its commercial aircraft division to Taiwan Aerospace Corporation for $2 billion has been greeted with outcries of dismay and outrage from Congress and some public-policy analysts. The sale barters away the "crown jewels," argues one critic. Thirty US senators have signed a resolution deploring the sale as a threat to US "national security and economic competitiveness."

The outcry symbolizes the paucity of hardheaded analysis in the United States at present, and the baleful consequences of what Columbia University economist Jagdish Bhagwati has labeled the "diminished giant" syndrome. In our often irrational breast-beating over no longer being No. 1 in every field and product, we increasingly seem unable to determine true national economic and security interests.

Critics of the McDonnell Douglas sale focus on three issues: threats to long-term defense interests; risks that US technology will be given away to competitors at bargain-basement prices; and fears that US high-tech jobs will be transferred to Asia. All these criticisms miss the mark.

Though earlier there were common technological characteristics between military and commercial aircraft, in recent decades such characteristics have diverged widely; in response to this reality, McDonnell Douglas has long since separated its military and commercial divisions. Furthermore, the US government has often dealt with the problem of "dual use" technologies in the past by instituting strict controls on disclosure or transfer of military-related technology.

Regarding the issue of sharing nonmilitary technology with a trading rival, McDonnell Douglas has retained exclusive responsibility for the design, development, systems integration, and final assembly - as well as construction of the cockpit - of the planned new MID-12. Design and integration are the areas where the "black box" of technological advance must be guarded. Mere airframe manufacturing (wings, fuselage, etc.), which is being assigned to Taiwan, engages widely known and dispersed technological capability.

The jobs question is related to this point. The routine manufacturing tasks being assigned to foreign partners are already employed widely abroad. And consider the employment effects inherent in the failure of McDonnell Douglas to find a foreign partner: The company would almost certainly cease commercial aircraft production, throwing many more US aerospace workers out of work. (McDonnell Douglas tried unsuccessfully to attract a US partner.)

OVER against these misguided fears, what are the benefits of the deal for McDonnell Douglas and the US? First, the new capital investment will allow the company to develop again a complete family of aircraft and regain world market share; it now competes in only two of the six commercial jet-aircraft market segments.

Second, because the commercial-aircraft market is highly politicized, with governments exercising a substantial influence over purchasing decisions, the alliance with Taiwan and later other Asian subcontractors will give McDonnell Douglas a leg up on other competitors. It is projected that Asia, the fastest growing market for commercial jet aircraft in the world, will buy about a third of all such aircraft by 2000.

Finally, because of the limited size of its economy and because of its political dependence on the US, it is highly unlikely that Taiwan will move in the future to become a prime aircraft contractor. Beyond this, a successful McDonnell Douglas-Taiwan Aerospace alliance is likely to deter the emergence of any other major competitors beyond Boeing and the Airbus consortium.

In their xenophobic zeal to condemn the McDonnell Douglas deal, critics have actually missed the most important potential future problem - the issue of government subsidy. The Taiwan government currently is the major investor behind Taiwan Aerospace. The US government should make it clear that it expects the venture to be gradually privatized. The US cannot oppose the grossly inequitable European Community subsidies for Airbus while defending such a development with regards to McDonnell Douglas and Taiwa n Aerospace.

With this important caveat, however, the deal is clearly in US economic interest because, if successful, it will ensure the continuation of McDonnell Douglas as a major competitor in international commercial jet-aircraft markets.