310. Memorandum From the President’s Assistant for International Economic Affairs (Flanigan) to President Nixon1
- Revised Proposal for Export of the B–1 Bomber Engine to France
Background. In 1972, General Electric and SNECMA (the French national engine manufacturer) proposed to develop jointly a new commercial jet engine. This engine is based on the core section of the engine for the B–1 bomber. Under the original plan the core was to have been exported to France in 1973, to be assembled with French components to complete the engine. For national security reasons, the GE export license request was denied.
In early 1973 GE unofficially submitted a compromise plan designed to meet our objections to the original export proposal. The compromise would postpone export of the B–1 core until late 1974. Further, GE would take charge of engine integration, and the most sensitive testing would be done in the U.S. rather than France.
National Security Issues. The revised GE proposal reduces many of the national security risks associated with the original plan, but it does not eliminate them. In the opinion of the Department of Defense, the revised license request does not yet provide adequate physical safeguards for the engine technology. Defense believes a formal government-to-government agreement guaranteeing safeguards would lessen these security risks still further.
Economic Issues. GE and its major domestic competitor, the Pratt & Whitney Division of United Aircraft, are both seeking foreign joint ventures for the development of new commercial engines. Because of the large investment required and long term character of the pay-back, neither firm seems willing to use solely its own funds. (It will cost about $350 million to develop this new engine.) Further, Congressional sup[Typeset Page 948]port for an all-U.S. engine development appears insufficient to support the next generation of military engines that would later yield commercial versions. Last, both GE and P&W wish to ensure their access to foreign markets, and both have concluded that joint ventures abroad are necessary for that purpose. Therefore, foreign joint ventures do provide some positive trade and employment returns to the U.S. These returns are particularly important because U.S. participation abroad will tend to forestall the formation of an all-European engine consortium. It thus seems economically desirable, if measured against the likely alternative of no all-U.S. engine program.
Although economic calculations indicate the U.S. will gain from the proposed ventures, it may cost us some of our traditional market and will enhance the longer term competitive strength of foreign manufacturers (e.g., SNECMA), (DoD would prefer to continue pressing for an all-U.S. engine program and to deny the GE license request.)
Research and Development Recoupment. The U.S. has invested about $100 million in that part of the B–1 core applicable to the proposed GE–SNECMA engine. Under the terms of the U.S. contract with GE covering development of the B–1 engine, the U.S. is entitled to recover the R&D applicable to foreign commercial sales (in this case, about $45–50 million over the market life of the engine).
However, the B–1 export is a special case, because its release under the compromise plan would be three years earlier than DoD practice usually permits. It is therefore argued that more should be recovered by the U.S. than that called for in the B–1 contract formula (e.g., $75 to $80 million, if domestic and foreign sales are included in calculating recoupment). GE has offered to pay the U.S. a royalty of $20,000 per engine. Based on their market estimates, the U.S. would receive about $80 million total recovery.
At issue is the adequacy of that offer, given the early release of the B–1 core, the importance of recovery, as well as other considerations of U.S. relations with France and Europe. Defense recommends that the U.S. obtain about $100 million, $50 million in an initial payment prior to any sales and $50 million from royalty on actual sales. However, under current law, license approval cannot explicitly be denied because of inadequate recoupment. License approval can only be made conditional on negotiation of a contract satisfactory to the United States. Since GE now has a valid government contract for this engine, the government cannot compel it to pay higher recoupment.
We are launching a study of the broad issue of recoupment of government investment in projects of this type. However, this effort will take several months. In the meantime, the French have indicated President Pompidou’s personal interest in this engine venture and their [Typeset Page 949] need to have a U.S. decision for purposes of their internal civil aviation planning.
You have the following options:
1. Grant the license as requested by GE. This is the Department of State position.
2. Grant the license on terms now proposed by GE, subject to an appropriate agreement concerning the physical security of the engine technology.
(Under either option granting the license, also seek assurances from the French that they will not seek EC tariffs against U.S. aircraft imports.)
3. Make no decision on this project for the Summit, but note that the U.S. is completing its analysis for a decision sometime after the Summit. This is the DoD position.
That you approve Option 2. Messrs. Kissinger and Shultz and Ash concur.
Summary: Flanigan requested Nixon’s decision on a revised proposal for export of the B–1 bomber engine to France.
Source: National Archives, Nixon Presidential Materials, NSC Files, NSC Institutional Files (H-Files), Box H–240, Policy Papers, 1969–1974, NSDM–220. Confidential. The draft decision memorandum was not attached. Nixon approved the second option. Nixon’s decision was conveyed in NSDM 220/CIEPDM 18, June 4, entitled “GE–SNECMA, CFM–56 Jet Engine Joint Development,” in which he approved the license subject to the conclusion of an agreement with France on physical security and protection of technology and an understanding that France would not seek new tariffs against U.S. aircraft imports into the EC. (Ibid.)↩