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But there was still a truly awesome perceived market for a lightweight fighter foreseen at the beginning of the last decade of the cold war. As part of the competitive struggle between the Soviet Union and the United States, and as a necessary prestige object in the new post-colonial developing world, vast numbers of fighter aircraft had been delivered in the 1960's. Furthermore, America learned the same lesson in Vietnam that they had learned in Korea - that their high-tech heavyweight fighters were vulnerable to lower-tech, shorter-range, but higher-performance air defense interceptors built by the Soviet Union. In the post-Korean world this lesson resulted in the F-104 and F-5, which were not taken up by the US Air Force but instead exported in vast numbers to US allies and developing countries on concessionary terms. The equivalent Soviet aircraft was the MiG-21. There were thousands of these in service, and they would need replacing in the last two decades of the twentieth century.

While the P-530/F-17/F-18 family was Northrop's prime candidate for future export business, Northrop had also been looking at improvements to the F-5E fighter. As early as 1975 a single-engined version of the F-5 using the F-18's F404 engine was studied. This could be part of an F404-engined 'high/low' F-18L/F-5X fighter mix similar to the USAF F-15/F-16 mix using the J100 engine. Others within Northrop wanted any improved F-5E to retain the traditional twin-engined layout, using two Garrett business jet engines equipped with an afterburner.

By the late 1970's Taiwan was embroiled in a series of difficult discussions with the United States about its future aircraft requirements. In the past the United States had fully supported Taiwan, but after the reapproachment with China by Nixon subsequent US administrations played a delicate balancing act of supporting Taiwan's defence needs while somehow minimizing offense to China. Taiwan had rejected an Israeli offer of Kfir C-2 aircraft for the Taiwanese fighter requirement, even though the US had given Israel clearance to sell the aircraft with the American General Electric J79 engine. But Taiwan had an absolute need to be able to fire all-weather radar-guided AIM-7 air-to-air missiles. So instead it wanted American F-4 aircraft, or eventually F-16 or F-18L fighters. None of these were acceptable to the US State Department, which saw even an early model F-4 as detrimental to negotiations with the People's Republic of China.

This led the US Department of Defense to ask Northrop to look at adapting the F-5E, already produced under license in Taiwan, to carry the AIM-7. But the basic F-5E equipped with the AIM-7, and with a radar similar to that used on the F-16A, suffered such performance degradation that the Taiwanese were not interested in it. Since Northrop was already looking at different engine combinations for a higher performance F-5X, the Department of Defense asked the company to select an airframe/powerplant combination that could accommodate the Sparrow. The F404 single-engine solution was found to be the most efficient alternative and was selected by Northrop chief designer Welko Gasich in June1978.

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