Europe can offer defense deals Washington can't refuse.

• Author: Sieff, Martin
• Position: Defense

The decision of U.S. Secretary of Defense Robert Gates to set aside the award of the U.S. Air Force's gigantic new air tanker contract to the European Aeronautic, Defence and Space Company (EADS) and its American partner Northrop Grumman dealt a body-blow to the principles of free trade and mutual cooperation in defense procurement in the Atlantic Alliance. But major European defense contractors should not despair: To a much greater degree than most people realize, there remains a wide spectrum of opportunities for the Europeans to boost their exports to the United States and thereby simultaneously strengthen defense capabilities on both sides of the Atlantic.

In overturning the tanker award and reopening the bid, the election-wary Bush administration apparently felt vulnerable to the argument that they were undermining the U.S. high-tech defense industrial base by awarding contracts overseas to a company that was already the main global rival for Boeing, America's one remaining premier airliner exporter and manufacturer.

Does this, therefore, mean that the U.S. military procurement market is going to be off-limits for European manufacturers? The answer is "no," for several reasons. European defense contractors already have a big and growing foothold in the U.S. market. U.S. budgetary constraints will enable Europeans to make some offers that the Pentagon cannot refuse. The strong euro offers takeover opportunities to enterprising European defense contractors. And processes of "structural disarmament" by Pentagon planners have left big gaps that no U.S. contractor can fill or even compete for.

One leading European defense contractor already has established itself as a major player in the U.S. market. That, of course, is Britain's BAE Systems. In a study released in June 2008, the New America Foundation, a Washington think tank, ranked BAE Systems among the top 10 defense contractors for the U.S. government. Department of Defense contracts for BAE rose from $4.7 billion in 2006 to $9.8 billion in 2007, a sales increase of $5.1 billion--the largest increase by any manufacturer that year. The second-biggest "gainer" was the U.S.-based General Dynamics, which could "only" boast an increase in sales over the previous year of $4.1 billion--$1 billion less than BAE.

How did BAE Systems do so extraordinarily well in the U.S. market? And how did it do so without provoking the protectionist and nationalist, quasi-isolationist fury in the United...