Northrop, EADS tanker win sparks controversy in U.S.

By Andrea Shalal-Esa - Analysis
Sunday, March 2, 2008; 1:57 PM

WASHINGTON (Reuters) - A surprising U.S. decision to bypass Boeing Co (BA.N) and award Northrop Grumman Corp (NOC.N) and Europe's EADS (EAD.PA) a $35 billion aerial tanker deal underscores the global nature of the defense market, and will clearly be a hot topic in U.S. national politics this year.

Signed late on Friday by Northrop and the Air Force, the fixed-price deal is an enormous boon for No. 3 U.S. defense company Northrop, dramatically expands EADS's foothold in the U.S. market and hastens the end of the Boeing 767 production line.

But with the U.S. economy in a slump and Boeing backers howling about potential job losses to Europe, U.S. lawmakers could still hold up the deal, and it may become a football in the presidential election.

The likely Republican nominee, Sen. John McCain of Arizona, led an investigation that killed an earlier Air Force proposal to lease 100 Boeing 767 tankers after a former top Air Force official went to jail for negotiating a senior job with Boeing as she was still overseeing that deal and others.

Now, opponents say, he has helped hand the huge deal to EADS, the parent company of Airbus. Northrop says 60 percent of its plane will be made in America and even the fuselage and tail of the Boeing 767 would have been built overseas, but "Buy America" rhetoric is an easy sell in hard financial times.

"The last bastion of the losing protectionist is to wave the bloody 'Buy America' shirt," said analyst Joel Johnson of the Teal Group. "It tells you they don't have another argument -- e.g., the (Northrop) product was newer, more capable and less risky."

Democrats Hillary Clinton and Barack Obama, still vying for their party's nomination, have not addressed the deal, but the issue of U.S. jobs going overseas is clearly on their radar.

Their Democratic colleagues in the Senate and House of Representatives are already raising questions about McCain's role in convincing the Air Force to take the U.S.-European dispute over airplane subsidies out of the competition.

"The U.S. government is bringing an action against Airbus in the World Trade Organization and subsidies should have been taken into account" in this competition, Rep. Norm Dicks, a Washington Democrat, told Reuters.

McCain urged Robert Gates, before he was confirmed as defense secretary, to remove the issue from the terms of the competition, saying it could eliminate one of the bidders from the start.

"McCain wrote a very strong letter to Gates," Dicks said. "Clearly it was on the side of Airbus."

Dicks said the Air Force would face tough questions in Congress. "Here we are in a recession and the U.S. government hands such a big contract to the Europeans," he said.

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