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Defense Acquisition: Rationale for Imposing Domestic Source Restrictions
(Letter Report, 07/17/98, GAO/NSIAD-98-191).

Pursuant to a congressional request, GAO reviewed the basis for the
domestic source restrictions imposed by Department of Defense (DOD)
policy and by 10 U.S.C. 2534, focusing on: (1) DOD's policy for
restricting procurement to domestic sources and the rationale for the
legislative restrictions; and (2) the suppliers and manufacturing
locations for items currently restricted. GAO did not assess other
congressionally imposed restrictions.

GAO noted that: (1) national security and industrial base concerns form
the basis for domestic source restrictions imposed by DOD and, to the
extent known, the basis for those imposed under 10 U.S.C. 2534; (2) DOD
guidance specifies the rationale for approving domestic source
restrictions; (3) the rationale for congressional restrictions is not
always identifiable; (4) in response to changes in defense requirements,
DOD has reevaluated domestic source restrictions; (5) with the end of
the Cold War, DOD is no longer preparing for large-scale mobilization
but is focusing on smaller conflicts that would use readily available
defense inventories; (6) at the same time, DOD wants to take advantage
of more competitive markets when doing so is consistent with national
security needs; (7) in 1995, DOD required the services to provide
detailed justification for maintaining the domestic source restrictions
covered by DOD policy; (8) DOD eliminated those restrictions it
determined were no longer essential to national security; (9) of those
items currently restricted by 10 U.S.C. 2534, all but one were in place
at the time of DOD's review; and (10) in only one case has DOD performed
an industrial base assessment to determine the need for a 10 U.S.C. 2534
restriction.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-98-191
     TITLE:  Defense Acquisition: Rationale for Imposing Domestic Source 
             Restrictions
      DATE:  07/17/98
   SUBJECT:  Defense procurement
             Buy national policy
             Defense contingency planning
             Industrial mobilization

             
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Cover
================================================================ COVER


Report to the Honorable
John McCain, U.S.  Senate

July 1998

DEFENSE ACQUISITION - RATIONALE
FOR IMPOSING DOMESTIC SOURCE
RESTRICTIONS

GAO/NSIAD-98-191

Defense Acquisition

(707337)


Abbreviations
=============================================================== ABBREV

  DOD - Department of Defense

Letter
=============================================================== LETTER


B-279769

July 17, 1998

The Honorable John McCain
United States Senate

Dear Senator McCain: 

In response to your request, we reviewed the basis for domestic
source restrictions imposed by Department of Defense (DOD) policy and
by
10 U.S.C 2534.  We did not assess other congressionally imposed
restrictions.  Specifically, we reviewed DOD's policy for restricting
procurement to domestic sources and examined the rationale for the
legislative restrictions.  As requested, we also identified the
suppliers and manufacturing locations for items currently restricted. 


   BACKGROUND
------------------------------------------------------------ Letter :1

There are numerous legislative authorities by which domestic source
restrictions are imposed to limit DOD procurement.  Under 10 U.S.C. 
2534, which contains restrictions on several types of items, the
Secretary of Defense is permitted to procure only from manufacturers
in the national technology and industrial base.\1 This restriction
can be waived when, for example, unreasonable cost or delays would
result, items of satisfactory quality are not available, or the
limitation would adversely affect a U.S.  company.  DOD also has the
authority to administratively restrict items for reasons of national
security and industrial base preservation, including protection of
sensitive technologies and products. 

The Buy American Act, Trade Agreements Act, and various
appropriations legislation, including the Berry Amendment, are other
legislative tools for imposing domestic source restrictions. 
Appendix I describes these legislative authorities. 


--------------------
\1 Under 10 U.S.C.  2500(1), Canada is considered part of the
national technology and industrial base.  The U.S.  and Canadian
governments have entered into a memorandum of understanding that
provides for persuading Canadian firms to voluntarily comply with
U.S.  government requests for production priority. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

National security and industrial base concerns form the basis for
domestic source restrictions imposed by DOD and, to the extent known,
the basis for those imposed under 10 U.S.C.  2534.  DOD guidance
specifies the rationale for approving domestic source restrictions. 
The rationale for congressional restrictions is not always
identifiable. 

In response to changes in defense requirements, DOD has reevaluated
domestic source restrictions.  With the end of the Cold War, DOD is
no longer preparing for large-scale mobilization but is focusing on
smaller conflicts that would use readily available defense
inventories.  At the same time, DOD wants to take advantage of more
competitive markets when doing so is consistent with national
security needs.  In 1995, DOD required the services to provide
detailed justification for maintaining the domestic source
restrictions covered by DOD policy.  DOD eliminated those
restrictions it determined were no longer essential to national
security.  Of those items currently restricted by 10 U.S.C.  2534,
all but one were in place at the time of DOD's review.  In only one
case has DOD performed an industrial base assessment to determine the
need for a 10 U.S.C.  2534 restriction. 


   CRITERIA FOR ESTABLISHING
   DOMESTIC SOURCE RESTRICTIONS
------------------------------------------------------------ Letter :3


      DOD'S POLICY
---------------------------------------------------------- Letter :3.1

The National Security Act of 1947 and the Defense Production Act of
1950 give DOD the authority to develop plans to fulfill military
requirements, maintain the domestic industrial mobilization base, and
establish an emergency mobilization preparedness program.  With this
authority, DOD has imposed agencywide domestic source restrictions in
the Defense Federal Acquisition Regulation Supplement.  In
implementing this authority, federal regulations and DOD guidance
recognize the need to restrict competition to domestic sources to
address national security concerns.  In April, we reported on DOD's
criteria and processes for imposing domestic source restrictions.\2

DOD's handbook for assessing defense industrial capabilities provides
guidance for determining when competition needs to be restricted to
support national security requirements.\3 This guidance indicates
that limitations on foreign sources may be necessary to (1) avoid
dependence on a politically unreliable foreign supplier or (2)
protect technologies and products that are classified, offer unique
war-fighting superiority, or can enable foreign governments to
develop countermeasures that could undermine the effectiveness of
U.S.  systems. 

Defense procurement may also be restricted to meet mobilization base
needs.  DOD's planning guidance reflects the changes in military
missions and requirements that have occurred since the end of the
Cold War.  DOD's plans no longer involve large-scale mobilization to
prepare for global war but instead focus on smaller conflicts that
would be fought using readily available defense inventories.  To
support this strategy, DOD established requirements to surge
production of certain items during a crisis and replenish supplies of
some items within a specified period of time after a conflict.  DOD
can restrict procurement to domestic manufacturers and can require
suppliers to give priority to its contracts.  This helps to ensure
control over the supplier and the capability to meet surge and
replenishment requirements.  These surge and replenishment
requirements are limited to munitions, troop support items, and
spares. 

DOD, along with the individual services and the Defense Logistics
Agency, is also authorized to restrict competition to domestic
sources for individual procurements.\4

According to the Federal Acquisition Regulation, agencies can
restrict procurement (1) for industrial mobilization or to maintain a
technical capability, (2) to implement the terms of an international
agreement, (3) when required by statute, (4) for national security,
and (5) when it is in the public interest, among other reasons. 


--------------------
\2 DOD's Rationale for Imposing Domestic Source Restrictions
(GAO/NSIAD-98-144R, Apr.  10, 1998). 

\3 Assessing Defense Industrial Capabilities:  A DOD Handbook, the
Under Secretary of Defense for Acquisition and Technology, DOD
5000.60-H (Apr.  1996). 

\4 The Competition in Contracting Act of 1984 requires that agencies
procuring products and services ensure full and open competition
through the use of competitive procedures but also provides for
protecting the U.S.  industrial mobilization base.  Section 2304 of
10 U.S.C.  allows DOD to restrict individual procurements.  The
provision is implemented in part 6 of the Federal Acquisition
Regulation. 


      RESTRICTIONS UNDER
      10 U.S.C.  2534
---------------------------------------------------------- Letter :3.2

Congress enacts domestic source restrictions using annual DOD
appropriation and authorization legislation that reflects a variety
of interests.  In some cases, Congress cites national security,
industrial base preservation, or economic reasons for enacting these
restrictions.  For example, in fiscal year 1984 DOD restricted anchor
chain to domestic production because it was viewed as a
mobilization-critical item; at that time, this restriction protected
the sole U.S.  supplier.  Congress enacted a corresponding
restriction in the fiscal year 1988 DOD Appropriations Act.  The
House report on this bill stated that the restriction on anchor chain
was "one way to make the Department of Defense aware of congressional
concern over our eroding U.S.  industrial base." As originally
enacted, the provision permitted only the use of U.S.  and Canadian
sources.  The next year, the provision was amended to remove Canadian
sources.  The change was likely prompted by a contract awarded to the
Canadian producer in 1988.\5

Our review disclosed other instances, however, in which the rationale
for the legislative restriction was not evident.  For example, the
legislative history for naval vessel components did not state the
rationale for the restriction.  In other cases where the original
justification is stated, no recent reviews have been completed
assessing the continuing need for the restriction.  For example, the
restriction on buses was enacted in fiscal year 1969 for economic
reasons.  No analysis of the restriction or the industrial base for
buses has been done since then. 

For some items, restrictions are based on multiple statutory or
regulatory provisions with different conditions or waiver authority. 
For example, miniature and instrument ball bearings were originally
restricted by DOD policy in 1971.  In 1988, DOD restricted
antifriction bearings for industrial base reasons.  In addition, in
each fiscal year since 1995, bearings have been restricted in either
appropriation or authorization language.  In fiscal years 1996 and
1998, ball bearings were restricted in both congressional bills, but
with different durations and waiver authority.  Moreover, in fiscal
year 1996, DOD rescinded its administrative restriction on miniature
and instrument ball bearings because the services and the Defense
Logistics Agency believed this limitation was no longer needed. 


--------------------
\5 The procurement history of that contract is described in 134 Cong. 
Rec.  H.  1002 (daily edition Mar.  22, 1988). 


   CHANGING SECURITY REQUIREMENTS
   HAVE LED TO RESCISSION OF SOME
   RESTRICTIONS
------------------------------------------------------------ Letter :4

In 1995, in response to changes in military policy and industrial
base concerns, DOD initiated actions to eliminate agencywide domestic
source restrictions imposed by DOD policy.  DOD wanted to take
advantage of more competitive global markets when consistent with
national security requirements.  DOD, the services, and the Defense
Logistic Agency reviewed DOD-wide domestic source restrictions
imposed by policy decisions and reported the results of these
assessments in DOD's February 1997 Annual Industrial Capabilities
Report to Congress.  As a result of these reviews, DOD rescinded the
administrative restrictions that it no longer considered necessary. 
Rescissions included restrictions for miniature and instrument ball
bearings, anchor chain, various ferrous forgings, precision
components for mechanical time devices, high-purity silicon, and
high-carbon ferrochrome.  Miniature and instrument ball bearings and
anchor chain continue to be restricted by legislation. 

When reviewing agencywide restrictions, DOD required the services to
do detailed justifications and analyses to support retention of the
restrictions.  DOD retained the restriction for
polyacrylonitrile-based carbon fiber, periscope tube forgings, bull
gear ring forgings, and ship propulsion shaft forgings.  In its
review of polyacrylonitrile-based carbon fiber, the Navy conducted a
study using the criteria established by DOD and determined that
retention of a domestic production capability was required for the
nation's long-term security and that rescinding the restriction would
seriously jeopardize the ability to retain this capability.  DOD also
retained the restriction for periscope tube and bull gear ring
forgings to prevent foreign access to specifications and
manufacturing processes, which could compromise the effectiveness of
selected Navy systems.  The restriction on ship propulsion shaft
forgings was retained due to unsettled conditions among domestic
suppliers.  Table 1 lists the original date of and current rationale
for the DOD-wide policy restrictions that were retained.  Appendix II
provides detailed information on the origins and rationale for each
item currently restricted. 



                                Table 1
                
                 Items Currently Restricted by DOD-Wide
                               Regulation

                                          Original
                                          date of     Current
                                          restrictio  rationale for
Item name                                 n           restriction
----------------------------------------  ----------  ----------------
Polyacrylonitrile-based carbon fibers     1987        Preserve
                                                      industrial
                                                      capability

Periscope tube forgings                   1984        Protect
                                                      sensitive data

Bull gear ring forgings                   1984        Protect
                                                      sensitive data

Ship propulsion shaft forgings            1984        Unsettled
                                                      conditions among
                                                      suppliers
----------------------------------------------------------------------
In its reviews of industrial base capabilities, DOD sometimes
includes items that are legislatively restricted.  These reviews
assess the capability for certain industries but do not generally
assess the current relevance of domestic source restrictions.  For
example, DOD recently assessed the industrial base for chemical
weapons antidote injectors to determine if surge requirements could
be met.  The study looked at the ability of the sole-source supplier
to meet requirements but did not assess the need for a domestic
source restriction. 

While not required to routinely assess legislative restrictions, DOD
will do so when directed by Congress.  For example, when Congress
imposed a restriction on vessel propellers, it also required the Navy
to conduct an industrial assessment to determine the need for a
restriction.  The Navy concluded the restriction was not needed to
sustain critical propeller manufacturing capabilities.  DOD officials
told us they do not regularly review statutory restrictions unless
requested by Congress or when the legislative restriction is
rescinded.  In those cases, DOD uses the criteria it has established
in agency policy guidance.  Only for propellers has DOD performed an
industrial assessment to determine the need for an item restricted
under 10 U.S.C.  2534.  Table 2 shows the date and source of
restrictions for those items currently covered by 10 U.S.C.  2534. 



                                Table 2
                
                Items Currently Restricted by 10 U.S.C.
                                  2534

                                Legislative origin
Restricted item                 of restriction        Years restricted
------------------------------  ------------------  ------------------
Buses                           Fiscal year 1969                    29
                                 Military
                                 Procurement
                                 Authorization Act
Ball bearings                   Fiscal year 1995                     3
                                 DOD Authorization
                                 Act\a
Chemical                        Fiscal year 1988-                   10
 weapons antidote                89 DOD
                                 Authorization Act
Anchor and                      Fiscal year 1988                     9
 mooring chain                   DOD
                                 Appropriations
                                 Act\b
Air circuit breakers            Fiscal year 1991                     7
                                 DOD Authorization
                                 Act
Naval vessel components         Fiscal year 1996                     2
                                 DOD Authorization
                                 Act\c
Sonobuoys                       Fiscal year 1993                     5
                                 DOD Authorization
                                 Act
Propellers                      Fiscal year 1995                     3
                                 DOD
                                 Appropriations
                                 Act\d
----------------------------------------------------------------------
\a DOD first restricted miniature and instrument bearings in 1971 and
antifriction bearings in 1988. 

\b DOD first restricted anchor chain in 1984 and mooring chain in
1986. 

\c One of the covered items, totally enclosed lifeboats, was
originally restricted in the fiscal year 1994 Defense Appropriations
Act. 

\d A restriction on propulsion systems (to include propellers)
originated in the fiscal year 1993 DOD Authorization Act under the
Navy Fast Sealift program.  A separate restriction originated in the
fiscal year 1994 Appropriations Act under the Fast Sealift program
for vessel propellers for new contracts and has appeared in every
appropriation act since.  The fiscal year 1995 DOD Appropriations Act
restricted vessel propellers 6 feet or more in diameter; this
restriction expired in February 1998. 

Appendix III provides a history and current status of the 10 U.SC. 
2534 restrictions. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :5

In commenting on a draft of this report, DOD stated that the report
accurately describes its rationale for imposing domestic source
restrictions.  DOD also provided some technical suggestions, which we
have incorporated in the text where appropriate.  The Department of
Commerce commented that it found the report to be comprehensive and
informative regarding the origins and status of the various
restrictions imposed by Congress and DOD.  The comments from DOD and
the Department of Commerce are reprinted in appendixes IV and V,
respectively. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :6

To review DOD's basis for determining domestic source restrictions,
we examined federal and DOD regulations and guidelines for assessing
the defense industrial base.  We reviewed relevant documentation and
reports and discussed DOD's policy and guidance with officials from
the Office of the Secretary of Defense, the Defense Logistics Agency,
the Army and Air Force headquarters, the Naval Sea Systems Command,
and the Department of Commerce, in Washington, D.C. 

To evaluate the rationale for DOD-imposed and 10 U.S.C.  2534
restrictions, we reviewed legislative and other histories for each
restriction and discussed the restrictions with the key buying
activities responsible for procuring these items.  These activities
included the Naval Sea Systems Command, the Naval Air Systems
Command, and the Defense Supply Center, Philadelphia.  We also
collected industrial assessments from the Commerce Department and
various industrial analysis offices in the Office of the Secretary of
Defense, the services, and the Defense Logistics Agency. 

We conducted our review between January and May 1998 in accordance
with generally accepted government auditing standards. 


---------------------------------------------------------- Letter :6.1

We are sending copies of this report to appropriate congressional
committees and to the Secretaries of Commerce and Defense.  We will
also make copies available to other interested parties on request. 


Please contact me on (202) 512-4841 if you or your staff have any
questions concerning this report.  Major contributors to this report
are listed in appendix VI. 

Sincerely yours,

Katherine V.  Schinasi
Associate Director
Defense Acquisitions Issues


ADDITIONAL RESTRICTIONS ON
PURCHASE OF NONDOMESTIC ITEMS
=========================================================== Appendix I

There are several legislatively imposed restrictions in addition to
those contained in 10 U.S.C.  2534 on the acquisition of nondomestic
items.  The major restrictions on acquisition of nondomestic items
are found in the Buy American Act, which applies to supplies; annual
appropriations act restrictions, which may address a wide variety of
products; and the Trade Agreements Act, which restricts nondomestic
purchases to selected countries. 


   BUY AMERICAN ACT
--------------------------------------------------------- Appendix I:1

The Buy American Act, 41 U.S.C.  (sections 10a to 10d), applies to
supply contracts exceeding the micro-purchase threshold ($2,500) and
contracts for services that involve the furnishing of supplies when
the supply portion of the contract exceeds the micro-purchase
threshold.  The act is implemented in part 25 of the Federal
Acquisition Regulation.  The Department of Defense (DOD) has
supplemented the Federal Acquisition Regulation implementation in its
departmental regulations. 

The act establishes a preference for domestic articles, supplies, and
materials by requiring that, with certain exceptions, only domestic
end products be acquired for public use.  The exceptions include

  -- articles that would be unreasonably expensive if purchased
     domestically;

  -- purchases for which the agency head determines that a domestic
     preference would be inconsistent with the public interest; or

  -- articles that are not mined, produced, or manufactured in the
     United States in sufficient and reasonably available commercial
     quantities or are not of a satisfactory quality. 

The act also includes an exception for articles, materials, and
supplies that are for use outside the United States.  For the purpose
of applying the preference, DOD will add 50 percent to the price of
the nondomestic product, while nondefense agencies add 6 percent if
the domestic offer is from a large business and 12 percent if the
domestic offer is from a small business. 


   APPROPRIATIONS ACT RESTRICTIONS
--------------------------------------------------------- Appendix I:2

Restrictions on DOD's procurement of nondomestic products frequently
appear in annual appropriations acts.  The DOD Appropriations Act for
1997, for instance, prohibited or restricted the expenditure of funds
for such things as anchor and mooring chain, handguns, and consulting
contracts.  Each appropriations act since 1996 has barred the
expenditure of funds appropriated by the act for the acquisition of
nondomestic ball and roller bearings and provided for waivers more
restrictive than those included in 10 U.S.C.  2534(d). 

These restrictions may be changed annually, omitted in a subsequent
year, or enacted as permanent law.  For example, until 1995, the DOD
appropriations act each year included a restriction (the so-called
Berry Amendment) against spending funds appropriated in that act on
food, clothing, certain textile products, specialty metals, and hand
tools that had not been produced in the United States.  In that year,
the language of the amendment was changed to provide that it would
apply during the "current fiscal year and hereafter" (section 9005,
Public Law 102-396).  The amendment applies to DOD procurements that
exceed the simplified acquisition threshold ($100,000).  It provides
exceptions for such items as those procured outside the United States
in support of combat operations or by vessels in foreign waters.  The
Berry Amendment is implemented in part 225 of the DOD supplement to
the Federal Acquisition Regulation. 


   TRADE AGREEMENTS ACT
--------------------------------------------------------- Appendix I:3

The Trade Agreements Act (19 U.S.C., sections 2501 to 2582), applies
to procurements subject to the Agreement on Government Procurement as
amended by the Uruguay Round Agreements Act (Public Law 103-465) and
other trade agreements.  The act prohibits the acquisition of
products from nondesignated countries, except in limited
circumstances, and provides an exemption from the application of Buy
American Act restrictions to products from designated countries that
are valued above a threshold determined by the U.S.  Trade
Representative.  Through other trade agreements, the exemption also
applies (with different thresholds) to Israeli end products offered
in procurements by certain nondefense agencies and to identified
products offered by Mexico or Canada, in implementation of the North
American Free Trade Agreement Implementation Act (Public Law
103-282). 


RATIONALE FOR DOD-IMPOSED
RESTRICTIONS
========================================================== Appendix II

The Defense Acquisition Regulation Supplement, subpart 225.71,
contains DOD's administrative domestic source restrictions.\1 In
1996, DOD rescinded a variety of restrictions but, to protect
national security and the defense industrial base, retained the
restrictions on polyacrylonitrile-based carbon fiber, periscope tube
forgings, ring forgings for bull gears, and forgings for ship
propulsion shafts.  The Department of Commerce played a role in
assessing the strength of the industrial base for producers of the
three forging items. 


--------------------
\1 In addition to these agencywide restrictions, DOD components can
limit competition on a procurement-by-procurement basis using
guidance in the Federal Acquisition Regulation. 


   POLYACRYLONITRILE-BASED CARBON
   FIBER
-------------------------------------------------------- Appendix II:1

Polyacrylonitrile-based carbon fiber is a component of advanced
composite materials used in aircraft. 

Original Source of Restriction:  The restriction on
polyacrylonitrile-based carbon fiber was originally imposed in the
fiscal year 1988 DOD Appropriations Act.  The act required that 50
percent of DOD's purchases of this item come from domestic sources by
1992.  The restriction was established to maintain a U.S.  industry
in advanced technology material composites. 

Current Source of Restriction:  There has been no legislative
restriction on polyacrylonitrile-based carbon fiber since the fiscal
year 1991 DOD Appropriations Act.  Instead, DOD has maintained this
restriction by administrative action. 

Item Suppliers:  Polyacrylonitrile-based carbon fiber is made by two
domestic companies, Amoco Performance Products, Inc., headquartered
in Alpharetta, Georgia, and Fiberite Holding, Inc., headquartered in
Tempe, Arizona. 

Recent Studies:  In the 1996 review of agencywide domestic source
restrictions, DOD concluded that the restriction on
polyacrylonitrile-based carbon fiber should be retained.  The Army
and the Air Force supported the removal of the restriction, but the
Navy believed that polyacrylonitrile-based carbon fiber was a
critical technology for meeting current and future operational
requirements of carrier-based aviation and other mission-critical
systems.  In justifying the restriction, DOD reported that
polyacrylonitrile-based carbon fiber is increasingly important to
achieving weapon system performance advantages necessary for military
superiority.  According to DOD, there is little advantage to
rescinding the restriction, while retaining it could sustain domestic
suppliers.  DOD also concluded that the issue should be reexamined in
3 years. 


   PERISCOPE TUBE FORGINGS
-------------------------------------------------------- Appendix II:2

Periscope tube forgings are uniquely customized.  The periscope has
thin walls (less than an inch) and a narrow diameter (about 7 inches)
along its 40-foot length.  The Navy is virtually the only market for
periscope tube forgings. 

Original Source of Restriction:  In 1984, DOD initiated the forging
procurement restriction in response to the serious deterioration of
the domestic forging sector and a rapid increase in imports.  The
restriction targeted those forgings with the highest import
penetration levels, primarily ferrous forgings used in Army and Navy
applications.  The restriction covered about 20 percent of forgings
used by the military. 

Current Source of Restriction:  In 1996, DOD rescinded many of the
forging restrictions listed in the Defense Federal Acquisition
Regulation Supplement but decided to retain the restrictions for
periscope tube forgings. 

Item Suppliers:  Periscope tubes are produced by National Forge
Company in Irvine, Pennsylvania, and by Jorgensen Forge Corporation
in Seattle, Washington. 

Recent Studies:  In late 1995, the Department of Commerce conducted a
review of the industrial base for periscope tube forgings.  It
concluded that, if restrictions were removed, physical capabilities
would remain, but the small margin of know-how and experience in this
sector would be placed in jeopardy and possibly lost.  The Department
of Commerce noted, however, that no foreign company was identified
that could make periscope tubes. 

In early 1996, the Naval Sea Systems Command reported that retention
of the restriction on periscope tubes is required to ensure U.S. 
superiority with respect to submarine visual systems.  The periscope
is the primary early warning and visual system employed by the
submarine.  To allow insight into the manufacturing process or
specifications could adversely affect U.S.  superiority in this area,
posing a threat to U.S.  war-fighting capability. 


   RING FORGINGS FOR BULL GEARS
   (GREATER THAN 120 INCHES IN
   DIAMETER)
-------------------------------------------------------- Appendix II:3

Gear suppliers use large, seamless, rolled ring forgings to
manufacture bull gears used in Navy systems.  About 75 percent of the
value of a bull gear comes from its ring forging. 

Original Source of Restriction:  In 1984, DOD initiated the forging
procurement restriction in response to the serious deterioration of
the domestic forging sector and the rapid increase in imports.  The
restriction targeted those forgings with the highest import
penetration levels, primarily ferrous forgings used in Army and Navy
applications.  The restriction covered about 20 percent of forgings
used by the military. 

Current Source of Restriction:  In 1996, DOD rescinded many of the
forging restrictions listed in the Defense Federal Acquisition
Regulation Supplement but decided to retain the restrictions for ring
forgings for bull gears. 

Item Suppliers:  Standard Steel Division of Freedom Forge Corporation
in Burnham, Pennsylvania, is the key supplier of large ring forgings
for bull gears.  Three other companies have the capability to make
large ring forgings--Ladish Company Incorporated in Cudahy,
Wisconsin; Scot Forge Company in Spring Grove, Illinois; and Lehigh
Heavy Forge Company in Bethlehem, Pennsylvania. 

Recent Studies:  In late 1995, the Department of Commerce conducted a
review of the industrial base for large-diameter seamless rolled
rings.  According to the Department of Commerce, if the restriction
were removed, physical know-how capabilities would very likely
remain.  Domestic firms use the same facilities to make other
products, and they are very competitive in quality, price, and
delivery.  However, the Department of Commerce concluded that some
technical skills and know-how specifically related to ring forgings
for bull gears could be lost because subsidies foreign companies
receive from their governments result in unfair competition. 

In early 1996, a Naval Sea Systems Command report stated that
restrictions on ring forgings for bull gears were necessary because
the manufacturer of these forgings requires information related to
naval nuclear propulsion, which is not releasable to foreign
countries. 



   FORGINGS FOR SHIP PROPULSION
   SHAFTS
-------------------------------------------------------- Appendix II:4

Forgings for ship propulsion shafts are specialized because they can
be over 70 feet long and finished to one-thousandth of an inch.  The
strength and torque requirements for the military are far more
stringent than for commercial shafts since the military has
requirements for speed, agility, strength, and the ability to
withstand attack in combat. 

Original Source of Restriction:  In 1984, DOD initiated the forging
procurement restriction in response to the serious deterioration of
the domestic forging sector and a rapid increase in imports.  The
restriction targeted those forgings with the highest import
penetration levels, primarily ferrous forgings used in Army and Navy
applications.  The restriction covered about 20 percent of the
forgings used by the military. 

Current Source of Restriction:  In 1996, DOD rescinded many of the
forging restrictions listed in the Defense Federal Acquisition
Regulation Supplement but decided to retain the restrictions for ship
propulsion shafts. 

Item Suppliers:  Erie Forge and Steel Company in Erie, Pennsylvania;
Jorgensen Forge Corporation in Seattle, Washington; and Lehigh Heavy
Forge Corporation in Bethlehem, Pennsylvania, produce ship propulsion
shafts for the Navy. 

Recent Studies:  In late 1995, the Department of Commerce reviewed
the industrial base for ship propulsion shafts.  It reported that, if
the restriction were removed, domestic capabilities would be
jeopardized and probably lost.  According to the Department of
Commerce, one manufacturer would go out of business and another would
exit the product line.  Although domestic producers are competitive
in quality and price, the Department of Commerce asserted that
subsidized foreign companies would be attracted to this market. 

In early 1996, a Naval Sea Systems Command report stated that, if
ship propulsion shaft restrictions were removed, the health of the
Navy's shipbuilding industry would not be endangered.  Adequate
industrial capacity would be expected to remain in the ship
propulsion shaft segment of the forging industry, with or without the
restriction.  The report did note that removing the restriction could
cause significant risk associated with the continued viability of the
suppliers and their ability and willingness to continue to provide
timely and affordable products should their business base decline. 

In August 1996, the Deputy Under Secretary of Defense, Industrial
Affairs and Installations, deferred the final decision on the
restriction for 1 year due to unsettled conditions affecting the
Navy's domestic suppliers.  As of June 1998, a final determination
had not yet been made. 


RATIONALE FOR 10 U.S.C. 
2534-IMPOSED RESTRICTIONS
========================================================= Appendix III

This appendix reviews the background and rationale for legislative
restrictions currently imposed through 10 U.S.C.  2534. 


   BUSES
------------------------------------------------------- Appendix III:1

Multipassenger vehicles or buses are used to transport military
personnel. 

Original Source of Restriction:  The lease, rental, or other
acquisition of buses was first restricted by the Military Procurement
Authorization Act for 1969 (Public Law 90-500, section 404).  During
House Committee on Armed Services consideration of the amendment that
included this provision, there was discussion that leasing
arrangements with Japanese companies were not economical in light of
then-current Buy American Act and balance-of-payment concerns. 

Current Source of Restriction:  The substance of the restriction has
remained largely unchanged since 1969.  The placement of the
restriction in the U.S.  Code has been changed on numerous occasions
and, as of the fiscal year 1993 National Defense Authorization Act
(Public Law 102-484), the restriction is now in 10 U.S.C.  2534. 
Under this restriction, DOD may not procure any bus unless the
manufacturer is a member of the national technology and industrial
base. 

Item Suppliers:  DOD is required to lease all of its buses from the
General Services Administration, to the extent that the General
Services Administration can fulfill the requirement.  The General
Services Administration currently procures buses from Bluebird Body
Company in Fort Valley, Georgia, and Thomas Bus Company in High
Point, North Carolina. 

Recent Studies:  DOD officials responsible for assessing the
industrial base had no knowledge of recent market or industrial base
analyses for buses. 


   CHEMICAL WEAPONS ANTIDOTE
   CONTAINED IN AUTOMATIC
   INJECTORS AND COMPONENTS
------------------------------------------------------- Appendix III:2

Chemical weapons antidote injectors are military-unique items
designed so that soldiers can rapidly administer them through
clothing upon exposure to nerve agents.  The antidotes,
autoinjectors, and manufacturing processes must be approved by the
U.S.  Food and Drug Administration. 

Original Source of Restriction:  This restriction was first enacted
by Congress in the National Defense Authorization Act for Fiscal
Years 1988-89 (Public Law 100-80, section 124).  The legislative
history provides no indication of the intended purpose of the
restriction. 

Current Source of Restriction:  The current language governing this
limitation comes from the National Defense Authorization Act for
Fiscal Year 1995 (Public Law 103-337, section 814) and has been
codified in
10 U.S.C.  2534.  The language restricts the purchase of chemical
weapons antidotes contained in automatic injectors, or components for
such injectors, to those manufacturers that are part of the national
technology and industrial base and meet other requirements. 

Item Suppliers:  Meridian Medical Technologies in St.  Louis,
Missouri, is the only supplier of autoinjectors approved by the Food
and Drug Administration.  Meridian also assembles the kits used by
military field personnel that contain the autoinjectors and antidote. 

Recent Studies:  DOD performed assessments in April 1996 and November
1997 to determine if there were sufficient industrial capabilities to
meet DOD requirements.  The studies found that, although peacetime
requirements are low, autoinjectors must be available quickly and in
large quantities in the event of a military contingency.  Meridian is
limited by a 4-month lead time for obtaining required autoinjector
components and drugs.  Assembly and sterility testing take
approximately 7 weeks.  Therefore, even if components are available,
Meridian cannot ship completed products until the eighth week of a
contingency.  DOD has awarded a contract to maintain production
capabilities for autoinjectors.  Since stocking components does not
eliminate all shortfalls in meeting contingency requirements, the
Defense Logistics Agency is discussing with Meridian an additional
requirement to stock finished goods to further alleviate shortfalls. 
According to one Defense Logistics Agency official, the agency would
like to have other suppliers of autoinjectors.  Currently, one
foreign firm has the capability to produce one type of autoinjector,
but this firm is not approved by the Food and Drug Administration. 


   AIR CIRCUIT BREAKERS
------------------------------------------------------- Appendix III:3

Shock-hardened circuit breakers are used across all classes of
nuclear- and nonnuclear powered ships and provide electric power
continuity and fault protection, imperative to ensure the reliability
and safety of critical ship systems.  Depending on the size and type,
a naval vessel will have two or three large air circuit breakers and
hundreds to thousands of smaller circuit breakers (generally not
restricted to domestic procurement). 

Original Source of Restriction:  This provision was first enacted in
the fiscal year 1991 National Defense Authorization Act (Public Law
101-510, section 1421).  Discussions in favor of the amendment noted
that a British firm was dumping air circuit breakers on the U.S. 
market and that these actions placed domestic producers at risk. 

Current Source of Restriction:  Procurement of air circuit breakers
is currently restricted under 10 U.S.C.  2534 to manufacturers that
are part of the national technology and industrial base. 

Item Suppliers:  SPD Technologies, Inc., in Philadelphia,
Pennsylvania, and Eaton Corporation's Cutler-Hammer/Westinghouse
Division, in Beaver, Pennsylvania, are the suppliers of
shock-hardened circuit breakers.  According to Navy personnel, SPD is
the current supplier of large air circuit breakers for naval use, and
holds a great deal of proprietary data on their manufacture. 

Recent Studies:  In 1994, the Navy issued a report at the direction
of the House Appropriations Defense Subcommittee concerning actions
necessary for ensuring that a production capability for a full line
of shipboard, shock-hardened circuit breakers will exist in the
future.  The Navy noted that for many types of circuit breakers,
there is only one supplier, and no alternative source.  In order to
foster long-term competition, the Navy gave all potential offerors
time to develop a competitive posture and qualify their circuit
breakers for future applications.  This study assessed the state of
the industry but did not review the need for the restriction.  There
is potentially some desire on the part of the Navy to use a more
common, marine-based type of circuit breaker.  These circuit breakers
would be less sensitive because the shock resistance would be built
into their casing. 


   WELDED SHIPBOARD ANCHOR AND
   MOORING CHAIN
------------------------------------------------------- Appendix III:4

Shipboard anchor chain is submerged only periodically and spends most
of the time in the ship's chain locker.  Mooring chain is part of a
permanent naval facility and is intended for long-term submergence
between overhauls.  These different requirements have implications
for the grade of material required. 

In 1983, the Navy changed its specifications from forged Di-Lok chain
with high-strength reliability, durability, and identical links to
welded anchor and mooring chain.  This change opened the Navy's chain
procurement to competition because many manufacturers were capable of
meeting the new product specification for welded chain. 

Original Source of Restriction:  In 1984, DOD administratively
imposed a restriction on anchor chain 4 inches or less in diameter. 
In 1986, DOD decided to include mooring chain in this restriction. 
Congress enacted a corresponding restriction in the fiscal year 1988
DOD Appropriations Act (Public Law 100-202, section 8125).  The
fiscal year 1989 DOD Appropriations Act (Public Law 100-463, section
8089) restricted the acquisition of anchor and mooring chain (4
inches or less in diameter) to U.S.  sources, eliminating items
manufactured in Canada from competition.  In 1996, DOD rescinded its
administrative restriction on anchor chain. 

Current Source of Restriction:  Anchor and mooring chain is currently
restricted in 10 U.S.C.  2534 to manufacturers in the national
technology and industrial base, which includes Canada.  The fiscal
year 1998 DOD Appropriations Act (Public Law 105-56, section 8016)
also restricts the purchase of anchor and mooring chain 4 inches or
less in diameter.  The chain must be manufactured in the United
States and the aggregate cost of domestic components used to produce
the chains must exceed the aggregate cost of components from foreign
sources. 

Item Suppliers:  Baldt, Inc., in Chester, Pennsylvania, and Lister
Chain and Forge, Inc.  in Blaine, Washington, are suppliers of anchor
and mooring chain.\1

Recent Studies:  In 1995, the Navy conducted a study of the two U.S. 
manufacturers of anchor and mooring chain.  This study noted that the
continued decline in overall Navy orders could adversely affect both
manufacturers' viability.  DOD did not determine if the anchor and
mooring chain production capability was critical to DOD requirements. 
In fiscal year 1996, DOD rescinded its self-imposed restriction for
anchor chain (although the legislative restriction stayed in place). 


--------------------
\1 In November 1997, Baldt, Inc.  filed a protest with us concerning
the award of a contract to Lister Chain and Forge, Inc.  The protest
focused on Lister's compliance with domestic manufacturing
requirements contained in the fiscal year 1998 DOD Appropriations
Act.  We denied the protest.  (Baldt, Inc., B-278648, Feb.  23, 1998,
98-1 CPD61.)


   VESSEL PROPELLERS
------------------------------------------------------- Appendix III:5

Used to move a ship, vessel propellers are devices that consist of a
central hub with radiating blades. 

Original Source of Restriction:  A restriction on propulsion system
components (to include propellers) originated in the fiscal year 1993
National Defense Authorization Act under the Navy Fast Sealift
program (Pubic Law 102-484, section 1022).  A separate restriction
originated in the fiscal year 1994 DOD Appropriations Act (Public Law
103-139) under the Fast Sealift program for vessel propellers for new
contracts and has appeared in every appropriations act since. 

A restriction on procurement of vessel propellers 6 feet in diameter
or more was first enacted in the fiscal year 1995 DOD Appropriations
Act (Public Law 103-335, section 8115).  The restriction required the
propeller manufacturers to use castings that were poured and finished
in the United States.  Debate in favor of the provision noted
concerns for preserving the defense industrial base and saving
American jobs.  The restriction was later codified at 10 U.S.C.  2534
by the fiscal year 1996 National Defense Authorization Act (Public
Law 104-106, section 806). 

Current Source of Restriction:  The restriction in 10 U.S.C.  2534
expired in February 1998.  Vessel propellers are currently restricted
if funded through the fiscal year 1998 DOD Appropriations Act, title
V, National Defense Sealift Fund (Public Law 105-56).  None of the
funds provided in that section can be used for new contract awards
for procurement of components, to include propellers, unless they are
manufactured in the United States. 

Item Suppliers:  Suppliers of propellers are Bird Johnson, Walpole,
Massachusetts; Bird Johnson, Pascagoula, Mississippi; Lockheed-Martin
Energy Systems, Oak Ridge, Tennessee; Stone Marine, Iberville,
Canada; United Defense, Minneapolis, Minnesota; and the Naval Foundry
and Propeller Center, Philadelphia, Pennsylvania. 

Recent Studies:  In an August 1994 report to Congress on propellers
over 12 feet in diameter, the Navy concluded that the industrial base
was in a fragile state due to the Navy's downsizing and the lack of
commercial shipbuilding.  The report also concluded that all
propeller manufacture work has historically been done domestically. 
In a July 1996 report to Congress, the Navy assessed the industrial
base for propellers 6 feet in diameter or more.  The report concluded
that it was not necessary to statutorily protect the domestic
industrial base for large propellers.  It stated that there has been
little historical interest by foreign manufacturers to enter the U.S. 
market, and restrictive language artificially constrains competition
and may result in propellers that are more costly to the Navy.  The
report also concluded that the constraint on competition may also
remove incentives for companies to modernize and develop new
technology.  According to the report, the combination of U.S.  Navy
and commercial shipbuilding work should sustain U.S.  propeller
manufacturers. 


   VARIOUS MARINE APPLICATION
   VESSEL COMPONENTS
------------------------------------------------------- Appendix III:6

10 U.S.C.  2534(a)(3)(B) includes a limitation on procurement of the
following items to the extent they are unique to marine applications: 

totally enclosed lifeboats - Safety of Life at Sea-qualified system
consisting of a standard lifeboat with a fiberglass encapsulated
shell, lowered by a winch and davit system to allow emergency
passenger disembarkment;
gyrocompass - a navigational device used to determine a ship's
position relative to the north-south axis of the earth;
electronic navigation chart system - an electronically stored data
package that shows maps and charts for various waterways on the
surface of the earth;
steering control systems - an automated or actuated system that
allows remote ability to throw power from a ship's bridge to its
rudder for directional control;
pumps - any one of numerous devices used to move fuel, water, or
other fluids throughout a naval vessel; and
propulsion and machinery systems - computerized sensor controls that
transfer critical operating data from propulsion and machinery
systems to shipboard monitoring systems. 

Original Source of Restriction:  Totally enclosed lifeboats were
first restricted in the House version of the fiscal year 1994 DOD
Appropriations Act (Public Law 103-139, section 8124).  The
restriction originally called for the lifeboats and associated davits
and winches to use at least 75 percent domestic parts and 100 percent
U.S.  labor for assembly.  The subsequent conference report reduced
the domestic content level to 50 percent domestic parts and labor. 
The legislative history does not elaborate on the rationale for the
restriction. 

The remaining marine-unique items were first proposed as part of the
House version of the fiscal year 1996 National Defense Authorization
Act (Public Law 104-106, section 806).  The items were deleted from
the Senate version of that bill but were later reinstated during
conference. 

Current Source of Restriction:  The totally enclosed lifeboat
restriction was again included in the fiscal year 1995 DOD
Appropriations Act (Public Law 103-335, section 8093).  It was
codified into 10 U.S.C.  2534 by the fiscal year 1996 National
Defense Authorization Act (Public Law 104-106,
section 806).  The original domestic content portion of the
restriction was dropped as a result of this codification. 

The remaining marine-unique items are still restricted under 10
U.S.C.  2534.  Some of the these items (pumps and propulsion system
components, engines, reduction gears, and propellers) are also
restricted to U.S.  sources by a provision in the annual
appropriations act applicable to new contracts entered into for Fast
Sealift ships (Public Law 105-56, Title V, National Defense Sealift
Fund). 

Item Suppliers:  Suppliers for each of the items are as follows: 

totally enclosed lifeboats - Schat Harding, Inc.  in New Iberia,
Louisiana;
gyrocompasses - Sperry Marine in Harvey, Louisiana, and Rentorn,
Washington;
electronic navigation chart systems - no current suppliers;
steering controls - Sperry Marine in Harvey, Louisiana, and
Charlottesville, Virginia, and C.S.  Controls in Orange, California,
and Houma, Louisiana;
pumps - at least 15 suppliers of pumps for naval vessels, located in
11 different states; and
propulsion and machinery control systems - at least 6 suppliers of
propulsion and machinery control systems for naval vessels, located
in 6 different states. 

Recent Studies:  Other than the study mentioned under the propeller
section of this appendix, DOD officials responsible for assessing the
industrial base had no knowledge of recent market or industrial base
analyses for any of the other marine-unique items found in 10 U.S.C. 
2534. 


   BALL BEARINGS AND ROLLER
   BEARINGS
------------------------------------------------------- Appendix III:7

Antifriction bearings are essential in any metal product with moving
parts and, therefore, are necessary for manufacturing defense
products varying from motor vehicles to high-accuracy gyroscopes for
missile guidance systems. 

Original Source of Restriction:  DOD has an extensive history of
administratively limiting bearing procurement.  In 1971, DOD imposed
a restriction on miniature and instrument bearings.  In August 1988,
the Office of the Secretary of Defense issued an interim rule that
DOD components may procure only antifriction bearings, components of
such bearings, or items containing antifriction bearings produced in
the United States or Canada.  In April 1989, the interim rule was
revised and adopted as a final rule.  DOD removed the restriction on
miniature and instrument bearings in fiscal year 1996; these bearings
are still restricted under the broader antifriction bearing
limitation. 

Ball and roller bearings were first legislatively restricted in the
fiscal year 1995 National Defense Authorization Act as part of the
general amendment to 10 U.S.C.  2534 (Public Law 103-337, section
814). 

DOD appropriations acts also placed restrictions on the procurement
of ball and roller bearings.  The fiscal year 1996 DOD Appropriations
Act barred the expenditure of funds for nondomestic items (Public Law
104-61,
section 8099). 

Current Source of Restriction:  The antifriction bearing restriction
is codified in 10 U.S.C.  2534 but expires on October 1, 2000.  A
restriction is also in place in the fiscal year 1998 DOD
Appropriations Act (Public
Law 105-56, section 8073), which requires all waivers to the
restriction to be signed at the secretarial level. 

Item Suppliers:  DOD purchased bearings from 159 domestic and 5
British companies in fiscal year 1997.  The domestic companies are
located throughout the United States. 

Recent Studies:  Prior to DOD's August 1988 imposition of the
antifriction bearing restriction, DOD's Joint Logistics Commanders
conducted a 1986 industrial base study of bearings, and in July 1988
the Commerce Department completed an investigation of the effects of
antifriction bearings imports on national security.  The 1986 study
concluded that the U.S.  bearing industry had eroded and that failure
to halt this erosion would result in a domestic bearings industry
that is unable to meet industrial surge and mobilization
requirements.  The 1988 restriction was intended to protect and
strengthen the domestic industrial base for an industry that was
described as critical to national defense.  In February 1993, the
Department of Commerce reported that the restriction had a positive
impact on the industry.  Commerce also reported that eliminating the
restriction would have a detrimental impact on the defense
superprecision bearings sector.  In 1997, a Commerce, Defense
Logistics Agency, and industry forum reported that the U.S.  bearing
industry had improved its competitiveness over the last decade. 


   SONOBUOYS
------------------------------------------------------- Appendix III:8

A sonobuoy is an electronic sensor dropped by Navy antisubmarine
warfare aircraft into the ocean.  These sensors provide the data
required for naval aircrews to detect, localize, and destroy
submerged submarines. 

Original Source of Restriction:  This prohibition was first enacted
in the fiscal year 1993 National Defense Authorization Act (Public
Law 102-484, section 833) as an amendment to 10 U.S.C.  2534.  It
originated in the Senate authorization bill (S.  3114).  The
pertinent Senate committee report indicates there was some concern
that, while DOD made it a policy to solicit from U.S.  and Canadian
suppliers, the Canadian government had recently awarded a sole-source
contract to a Canadian firm.  The Committee was "concerned that .  . 
.  U.S.  manufacturers are not being treated in an equitable manner"
and "believes that the principle of reciprocity should prevail in
such procurement." The language has not changed since it was enacted. 

Current Source of Restriction:  Currently codified in 10 U.S.C. 
2534(e), this restriction is unlike others.  Procurement is
restricted only if the foreign sonobuoy manufacturer comes from a
country that does not allow U.S.  sonobuoy manufacturers to compete
on an equal basis. 

Item Suppliers:  The Navy procures sonobuoys from Raytheon Systems
Corporation in Fort Wayne, Indiana; Spartron Corporation in Jackson,
Mississippi; and Hermes Electronics, Inc.  in Nova Scotia, Canada

Recent Studies:  In fiscal year 1998, the Naval Air Systems Command
conducted an assessment of the sonobuoy industrial base.  The
legislative restriction on sonobuoys was not reviewed.  This
assessment concluded that the industrial base can support current and
projected Navy sonobuoy needs.  However, it also concluded that
planned procurement may not support two U.S.  suppliers.  In
addition, the assessment stated that past competition between vendors
has kept sonobuoy costs down and quality up. 




(See figure in printed edition.)Appendix IV
COMMENTS FROM THE DEPARTMENT OF
DEFENSE
========================================================= Appendix III




(See figure in printed edition.)Appendix V
COMMENTS FROM THE DEPARTMENT OF
COMMERCE
========================================================= Appendix III


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix VI

NATIONAL SECURITY AND
INTERNATIONAL AFFAIRS DIVISION,
WASHINGTON, D.C. 

Blake Ainsworth
Brian Mullins
Karen Zuckerstein

OFFICE OF THE GENERAL COUNSEL

Margaret Armen
John Carter
Behn Miller
William Woods

*** End of document. ***