A HOSTILE COUNTRY with the world's fastest growing army lies 90 miles away. Slightly to the North, an eccentric dictator just acquired a nuclear bomb. Your friendliest neighbor is constitutionally prohibited from having any military at all. The one country willing to defend you sits on the far side of the Pacific.

Welcome to Taiwan.

A vulnerable frontline state that only 24 other countries even admit exists, Taiwan needs armaments. The United States excels at developing and selling them. It should be a match made in heaven.

But nothing is simple when it comes to Taiwan. Take submarines. Taipei's ruling party decided back in 2001 to buy eight diesel-electric subs for $12 billion. The problem is they are only made in Europe and no European country will sell them to Taiwan for fear of offending China. The Euros will license their technology to the United States, however, which can ask defense contractors in Connecticut or Mississippi to make them for Taiwan. Problem solved, right?

Actually, no. The Executive branch and the Defense Department may like the deal because they get 15 percent of the $12 billion. But the U.S. Navy hates it. Why? Because the diesel subs in question aren't like the ones your grandpa likes to watch on the Memorial Day movie marathon. They are fast, quiet, relatively cheap, and extremely efficient when patrolling a continental shelf or shallow waters like the Taiwan Strait. It took decades for the Navy to get its all-nuclear sub fleet. The last thing admirals want is for congressmen to have a cheaper alternative that provides jobs in an American shipyard.

So the Navy does everything it can to kill the deal. It imposes a $360 million upfront charge before the subs are even designed, a poison pill the Navy never would agree to itself. Then it tells Taipei that even if the fee is paid the subs will take eight years to build, and 13 to fully deploy.

With nearly 900 ballistic missiles pointed at you, spending $4.3 billion for Patriot missiles seems a wise purchase. But, at $3.5 million a pop, Patriots are expensive. No country can afford to fight a defensive missile war for long.

The key to defending against missiles is to identify their source and then return fire with your own land-based cruise missiles, hoping in the meantime that your Patriots knocked down most of the first wave of incoming missiles. But, Whoa! A cruise missile is an offensive weapon and buying one would upset China.

So how does Taiwan back out of the Patriot deal in a face saving way? By asking voters to approve the purchase in a referendum. That's like asking Californians to finance a stadium for the NFL. But after the referendum fails the Pentagon insists Taiwan still buy the missiles.

Why? Because the unit cost goes down with every new Patriot missile produced. A big order for Patriot missiles reduces the price for everybody, including the U.S. Army.

Buying 12 refurbished P3-C Orion anti-submarine warfare aircraft should be a no brainer. At $1.5 billion they are pretty cheap--and absolutely essential given China's growing submarine fleet. But buying Orions requires economic decisions that are bound to offend somebody.

If Taiwan buys the Orions through the U.S. Navy, the Navy will take the order to Lockheed, the designer of the plane and a prime Navy supplier. This is the easiest way to get your renovated planes, but remember, you'll have to pay the Navy that 15 percent premium.

Enter L-3 Communications, a private American company that buys used Orions from bone yards and installs new avionics. If Taiwan requests an open competition on its ASW purchase, it knows L-3 will win because it can supply the same Orions as Lockheed for less money. The Navy is required to ask for an open competition if requested, but if Taiwan deals direct with L-3 it loses the 15 percent fee. So the Navy tells Taiwan it will happily arrange open bidding, but the process will take 24 to 30 months to arrange.

Will Taiwan ever get its submarines? Can the Patriot deal be revived? Will the economic advantages L-3 offers triumph over Lockheed's political contacts? Tune in next year for the exciting conclusion.

East-West News Service editor David DeVoss writes often about Asia.

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