BASIC PAPERS

By Kathleen Miller and Theresa Hitchens

The July 27, 2000, agreement by Europe’s six largest arms producers to ease barriers to cross-border restructuring of the defense industry includes new measures to streamline trade among the partner nations and, more importantly, outlines new procedures for determining export destinations for weaponry produced by multinational firms or joint ventures.

These six parties signing the "Framework Agreement Concerning Measures to Facilitate the Restructuring and Operation of the European Defense Industry"– France, Germany, Italy, Spain, Sweden and the United Kingdom – account for about 90 percent of all European Union (EU) arms exports. The six partners further have agreed to open the accord, once ratified and implemented, to other members of the 15-nation European Union.

There is widespread agreement among government officials and industrialists across Europe, and indeed in the United States, that cross-border harmonization of export controls is necessary in Europe, in part to sustain a viable defense industry capable of providing cutting-edge military technology at an affordable price. For European companies, even if they are successful in building more robust cross-border firms, exports will remain vital to maintaining a reasonable bottom-line, due to simple economies of scale in Europe.

Defense spending in the six signatory countries in 1998 was an estimated $147 billion. This is in comparison with U.S. spending of almost $270 billion. Even taking defense expenditure throughout the European Union into consideration brings only a total of $166 billion – about 61 percent of U.S. spending.[1]

Military spending by the six parties to the Framework Agreement on average equaled 2.2 percent of GDP, while the United States spent about 3.4 percent.[2] 

That said, there also are inherent dangers in the process of industrial restructuring – in particular with regard to export control. If the Framework Agreement is successful in reducing, or eventually eliminating, certain export controls among the signatory countries, the door may open to an increase in arms proliferation across the continent and beyond. The current design of the agreement seems likely to reduce the level of transparency surrounding arms exports, and also could lead to lowest common denominator in choice of export destinations.

In addition, there will be significant economic and political pressure brought to bear by larger, more powerful defense firms (i.e., with substantial employment in several European countries) to widen export opportunities, rather than restrict them.

Coupled with U.S. government moves to ease exports of U.S. arms and weapons technology to NATO and other allies, there is a danger of a downward spiral in export control that makes technology leakage to undesirable destinations more likely. Governments on both sides of the Atlantic need to be aware of these dangers, and recognize that protecting the American and European technology edge through proliferation prevention is every bit as necessary as ensuring a strong defense industry base.

On July 6, 1998, the defense ministers of France, Germany, Italy, Spain, Sweden and the United Kingdom signed a Letter of Intent (LOI), which was intended to set the framework for discussions on restructuring of the European defense industry. The countries have been involved in negotiations for the past two years, debating such issues as security of supply, security of classified information, and protection of commercially sensitive information, but finally reached an agreement in Stockholm last May. After wavering for some months over the formal accord, the six nations signed a so-called Framework Agreement on July 27, 2000, during the premier U.K. air show at Farnborough. The agreement will be legally binding, with the status of an international treaty, once ratified by national parliaments.[3]

The 1998 LOI expressed the ministers’ agreement that one of the European Union’s top priorities should be "to harmonize the requirements of their armed forces, their procurement, research and technological development policies and defense related aspects of their export procedures." At the time, it was understood that in order to accomplish this goal, "certain obstacles to industrial restructuring" in the aforementioned areas would have to be eliminated.[4] 

The agreement aims to "ensure more cost-effective and long-term defense procurement," in addition to establishing "a notion of mutual interdependence in some fields as a complement to national independence."[5]  Therefore, the LOI can be regarded as an effective way to overcome the "incapacity of European states as a whole" to make possible the consolidation of the EU defense industry.

The LOI, and the subsequent Framework Agreement, demonstrate European desire to become a serious competitor to the United States in the global arms market. Currently, the six partner nations account for nearly all European defense equipment production. However, European exports on the world market are dwarfed by those of the United States.

In 1998, 41 of the top 100 arms-producing companies in the world were American, compared with 35 companies combined for the six parties to the Framework Agreement. As a result of rapid consolidation in the U.S. defense industry, the top American firms were able to capture an additional 3 percent of the market from 1996-1997, while the top European firms lost 2.2 percentage points.[6]

The United States continues to rank as the number one arms supplier, as it has since 1993. In 1998, the United States exported about $12 billion in conventional weapons. This accounted for more than one half of the total for the top 31 suppliers in the world. In contrast, the six parties to the Framework Agreement exported about $6 billion combined.[7] In fact, European countries themselves often buy U.S. defense equipment because of cheaper prices allowed by U.S. economies of scale.

Therefore, one of the goals of the six parties is to reduce European dependency on American goods, as well as to secure a larger portion of lucrative third-party export markets in Asia, the Middle East and Latin America.

In 1997, EU Industrial Affairs Commissioner Martin Bangemann urged European aerospace firms to find a "trans-European solution" to the emerging competition they faced from U.S. mega-firms, such as Boeing Co., Lockheed Martin Corp. and Raytheon Co.[8]

"The defense industry in Europe is fragmented. There is over-capacity in many sectors and too much duplication of effort. Without restructuring, it will not be strong enough to survive in a market dominated by the American giants," stated then U.K. Defence Secretary George Robertson.[9]

Therefore, at the heart of the political momentum toward the LOI was the political determination that only by consolidation across borders could the European defense industry remain competitive on the global market.

One of the most significant steps in this direction was the 1999 merger of DaimlerChrysler Aerospace AG (DASA), Munich; the Lagardère Group, Paris; and the French state’s aerospace industry. Subsequently, Spain’s largest aerospace producer, Constucciones Aeronautics (CASA), Madrid, and Italy’s Alenia Aerospazio, a daughter of state-owned Finmeccanica SpA, Rome, have joined the group, creating the European Aeronautic Defence and Space Co., EADS Inc. The new corporation is Europe’s largest aerospace company, and, according to the annual Top 100 review of defense and aerospace firms by Defense News, the second largest worldwide in terms of 1999 sales. According to the Defense News ranking, published Aug. 7, 2000, EADS’ 1999 (pro forma) revenue is $33.17 million, vs. Boeing’s $58 million.

The objective behind EADS was to bridge the gap between U.S. and European capabilities and, in some cases, establish dominance in Europe in selected areas of production.

The Framework Agreement is the first step toward implementing the goals established in the LOI. It is designed to assist in the harmonization of the European defense industry and advance its development into a global competitor.

To do this, the six governments have had to accept some politically difficult realities, including the fact that some countries may lose certain defense development and production capabilities hitherto considered vital to national security. For that aspect alone, the agreement is groundbreaking. It is also a harbinger of the growing importance of defense industrial policy in shaping European thinking as the European Union proceeds with efforts to craft a common foreign and security policy.

The Framework Agreement covers seven major areas: security of supply; transfer and export procedures; security of classified information; defense related research and technology; treatment of technical information; harmonization of military requirements; and protection of commercially sensitive information.

Although the agreement will establish the foundation for restructuring, many more detailed accords will be necessary to implement the Framework, European officials admit. Various issues, which will be politically and practically difficult to work out, have been dealt with only in the vaguest of terms, therefore more consultations and negotiations will be required.

Two of the most significant changes that will result from the implementation of the agreement deal with export control procedures and the determination of export destinations. The ultimate goal of the changes is eliminating barriers to cooperative defense production, as well as ensuring wide export possibilities.

A critical section of the Framework Agreement governs the export control process for weapons developed jointly by two or more of the parties. European defense companies argue that the existing licensing system impedes the creation of joint ventures across European borders, thereby placing the European defense industry at a disadvantage in the global market.

In addition, individual European countries have vastly differing national laws in regards to defense related matters. EU legislation, in the form of Article 223 of the Treaty of Rome, left it to the discretion of each EU member state to "take such measures as it considers necessary for the protection of the essential interests of its security which are connected with the production of or trade in arms, munitions and war material…"[10]  Harmonizing export procedures will be a major step toward removing obstructions to cross-border cooperation, according to European officials.

Under the agreement, participant countries will agree in advance, by consensus, on a list of countries to which exports of a joint weapon system will be permitted. In other words, the current practice of case-by-case decision-making, as outlined in the June 1998 EU Code of Conduct on Arms Exports, on when to grant arms export licenses will be replaced by so-called ‘white lists’ of agreed destinations. These lists are expected to vary depending on the project. For example, restrictions on the export of attack helicopters may be different than those on small arms and light weapons or on missiles.

The consultations on acceptable export destinations will take many factors into consideration, such as national laws, the EU Code of Conduct on Arms Exports, and the promotion of the European defense industry.

However, under current plans, these lists will not be subject to public or parliamentary scrutiny. And although the Framework Agreement contains language citing the need for white lists to be developed based on the EU Code of Conduct, the lack of transparency is a cause for significant concern – allowing for backroom pressure on countries opposed to particular export destinations. Politically, the development of secret lists of export destinations is a retrogressive step. Since the signing of the code, EU member states have made significant strides towards achieving greater transparency. This progress is clearly undermined by the development of white lists.

While the agreement does provide for the removal of a country from a list of permitted destinations in cases where there is political change, the method is satiated with potential loopholes. Decisions about the white lists will be made years in advance of a sale and there is no systematic process for reviewing those lists. It is up to the participant countries themselves to raise objections to export destinations. Further, such an action is only envisaged in the event of major developments, such as ‘full scale civil war’ and only after a lengthy consultation process among partners. The bar has been raised so high that initiating debate on destinations could have large-scale foreign and domestic political ramifications. This proposed new system is clearly less able than the present one to respond flexibly to changing conditions.

This agreement will allow for the free circulation of components and finished products in joint ventures among the six participating states. This is expected to eventually result in the lifting of nearly all controls on arms transfers among the six countries, for their own use, or subsequent re-export within the European Union. Clearly this is potentially problematic because there are no written guarantees to bolster the weaker monitoring systems of some of the parties. The chance for technology leakage outside EU borders could rise, particularly in the case of weapon components, electronics and avionics.

In order to reach the level of cooperation that the Framework Agreement seeks to provide, it is conceivable that the six parties will be forced to drop export control standards to the lowest common denominator. It will be much more difficult for countries with traditionally stronger political concerns about the impact of arms exports, such as Germany and Sweden, to force the others to adopt their relatively stringent practices. There will be considerable pressure on countries with higher standards to accept the inferior procedures of the other participating states. The final result of which could be the diluting of export controls among Europe’s top arms producers.

Currently, decisions made on export destinations of joint venture products are the sole responsibility of the country of final assembly. For instance, if France, Germany and Sweden participate in a particular project, but the final assembly is completed in France, it will be left to France’s discretion to decide where the product can be exported. This practice often results in a final assembly site being chosen to allow the widest export possibility.

The new agreement allows for each participating country to have a voice in the decision-making process. Proponents of the agreement argue that this will allow collective pressure to closely examine prospective destinations, and give more opportunities for countries with traditionally strong export controls to have a say. It also will prevent industry from relocating manufacturing capacity to countries with lower export barriers and easier reporting requirements, supporters say.

However, officials in several European governments have admitted to BASIC that, in the back-room reality of decision-making on white lists, each country’s influence over export destinations will be largely proportional to its role in the joint venture. For example, if Spain provided only the nuts and bolts for an aircraft, the weight of an attempted veto would be minimal.

This de facto proportional veto system could further weaken European export controls because the countries that are certain to be the biggest contributors to any joint venture – the United Kingdom and France – are the countries where the defense industrial base is larger and thus has greater political influence. In fact, in France, the state still holds a significant share in the defense and aerospace industry. Once again, this will make it extremely difficult for the parties with more sensitive political controls to overrule export destination decisions. This could possibly result in erosion of the EU Code of Conduct and the export standards of some nations.

Although the Framework Agreement will be legally binding once national parliaments have ratified it, any new arrangements detailed in the agreement are intended to be "within the ambit of the EU Code of Conduct on Arms Exports." This code, which relates arms sales to human rights concerns was adopted on June 11, 1998, by EU foreign ministers.[11]

The code, which aims to set "high common standards for the management of and restraint in arms exports from the EU," is a politically binding agreement under which member states agree to abide by certain criteria when granting arms export licenses. Some of the determining factors include protection of human rights, risk of diversion and re-export, and impact on regional stability. However, adherence to the code is voluntary. It also is subject to interpretation, which has resulted in differences among the six participating countries’ implementation in practice.

Still, significant progress on regulating the arms trade has been made since EU members agreed to the code’s principles and consultation mechanisms. The code already has been effective in denying certain exports and has attracted support of a number of countries outside the European Union. Nevertheless, the text of the agreement does contain weaknesses that must be addressed before it can truly be considered as an international standard on arms transfers.

The EU Code of Conduct remains somewhat limited in its effectiveness in controlling arms exports, namely because:

• It is not a legally binding agreement, which means that there is no mechanism to enforce the code’s conditions;

• While the process of bilateral consultation on denial notification is a valuable step forward, it is no substitute for transparent multilateral information exchange. While the consultative process so far has proven to be relatively effective in ensuring that nations do not undercut each other’s license denials, the fact that any country can choose to export despite another’s denial remains a dangerous loophole.

• The code requires an annual report to be distributed to the European Union’s governing Council of Ministers, but not to national parliaments or the public.

The EU Code of Conduct is intended to provide a minimum standard for countries to follow without discouraging individual countries from pursuing more stringent controls. The Framework Agreement, which unlike the code would have the force of law, has the potential to set the code instead as the maximum standard. In other words, the implementation of the Framework Agreement could force the code to quickly develop into a ceiling, rather than the floor it was intended to be. Countries currently following more restrictive policies than the code decrees could be pressured into accepting weaker standards.

On May 24, 2000, U.S. Secretary of State Madeleine Albright announced the new steps the U.S. government will take to improve efficiency in the export license approval process, while at the same time maintaining necessary controls to protect U.S. security. Seventeen proposals were agreed upon, including the potential for new arms export licensing exemptions and loosening restrictions on third-party transfers of U.S. equipment in some cases.[12] The initiative is designed to reduce the burdens on the defense industry, however the focus on assisting commercial interest could jeopardize controls on the proliferation of both light and heavy conventional weapons.

This initiative came into being with strong support from the defense industry and the Department of Defense, both of which were searching for a way to increase cooperation with U.S. allies. "The Kosovo experience crystallized the problem in the minds of senior Defense Department officials," Joel Johnson, vice president for international affairs at the Aerospace Industries Association, a Washington-based industry lobby group, was quoted by Defense News. "They saw just how the arms export system affected our relations with our allies and how it affected the allies’ ability to work with us on the battlefield."[13]

The State Department initially was split on how far-reaching the reforms should be. According to Defense News, the Bureau of European Affairs staff sought radical changes to appease European allies, while the Bureau of Political-Military Affairs advocated a more ‘building block’ approach.[14]  State Department officials also clearly were concerned that the new initiative would weaken their mandate over export controls and hand power over to the Department of Defense.

The extension of International Traffic in Arms Regulations (ITAR) exemptions to qualified countries (Britain and Australia are the first candidates) would allow these countries to obtain U.S. defense articles license-free, once they have demonstrated that they possess policies congruent to the United States in export controls, industrial security, intelligence and law enforcement. The danger is that even if U.S. allies can raise their security standards to those of the United States, the elimination of a paper trail could reduce the U.S. government’s ability to conduct effective end-use monitoring and equipment tracking.

Canada was the only country ever granted such a blanket exemption to the ITAR. However, the United States suspended this exemption in 1999 after it was discovered that Canadian firms transferred sensitive technology to Iran and China.

In a March 16, 2000, letter to Albright, Sen. Jesse Helms, R-N.C., chairman of the Senate Foreign Relations Committee; the ranking Democratic member, Sen. Joseph Biden, D-Del.; Rep. Benjamin Gilman, R-N.Y., chairman of the House International Relations Committee; and Rep. Sam Gejdenson, D-Conn., the ranking minority member of the committee, expressed their "adamant opposition to any proposal extending exemptions –i.e. a Canada-like exemption – to allied nations."

In another letter on the same date, Helms and Gilman wrote to Albright objecting to the re-issuing of Canada’s exemption. The letter states that assurances should be made "that implementing decisions…will not result in additional diversions of technology and will not weaken generally enforcement of export controls and, specifically, that the U.S. retains the ability to prosecute and extradite individuals and entities which violate U.S. export control laws."

The DTSI also permits the retransfer of U.S. goods if the defense articles are being sent to NATO countries, Japan or Australia, countries which have already signed end-use and retransfer assurances. Despite the fact that the aforementioned countries are U.S. allies, the scope and effectiveness of their arms exports controls vary.

It should be noted that the U.S. reforms have the potential to "increase our mutual security by enhancing defense capabilities, promote interoperability with our coalition partners, and promote trans-Atlantic defense industrial cooperation and competition."[15]  The potential is there to leverage improvements in European controls. However, if an effective implementation strategy is not devised, the changes in U.S. policy coupled with the harmonization of European export regimes could create a vacuum of control between the world’s largest arms exporting regions.

The Framework Agreement presents the European countries with a valuable opportunity to consolidate their defense industries and coordinate armaments policies. The agreement, in conjunction with the recent U.S. reforms, may also contribute to an increase in transatlantic cooperation in the defense industry.

It is not inevitable that this new agreement will lead to an erosion of European export controls. However, to ensure that export controls are not compromised, it is critical that the six partner nations strive to eliminate the loopholes and increase transparency in an agreement designed to become legally binding.

Rather than allowing the EU Code of Conduct to serve as a minimum set of guidelines, the parties should strive to adopt the highest standards already in practice in Europe. The signatories must not allow the simplified procedures of the Framework Agreement to undercut states following best practice in the European Union.

Generally, the states with the most transparent procedures governing export controls have the most reliable and effective systems in practice. The planned white lists would remain secret. Government officials argue that this is necessary to protect ‘commercial confidentiality.’ , However this directly contradicts the aim stated in the EU Code of Conduct to promote "greater transparency" among the EU members.

The six partner nations should therefore make an explicit commitment that each national parliament will have the opportunity to review the white lists before governments make any final determinations about export destinations. In addition, whatever the country of final assembly and export, it is critical that transfers of joint venture equipment are clearly recorded within each country’s annual reports on arms sales. It is essential that any exports are fully recorded in the annual report of each project partner.

The participants should establish a system of review that would be more effective in adapting white lists to changing security environments. Because white lists will be determined before production even begins, the lists should be reviewed again once production is completed and before the defense equipment is exported. National parliaments also should be allowed to call for review.

Although the agreement will make cooperation across borders less complex, the parties should still insist on the issuance of end-user certificates – including among the partner nations. The requirement for end-use certificates will be even more important if the agreement is expanded to current, or future, EU members. End-use certification is critical to ensuring that defense articles are not diverted to countries not on white lists, and providing a means to trace back any diversions that occur. Removing barriers to cooperation should not result in an elimination of a paper trail. In fact, the participating governments should make a concerted effort to improve end-use monitoring and after-sale verification processes.

If companies or countries violate the agreement, all parties should be notified immediately and the violators should be removed from destination white lists until a thorough investigation can be conducted. If a violation is proven, the company/country should be ‘black-listed’ for a defined period of time.

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Endnotes

1 The Military Balance 1999-2000, The International Institute for Strategic Studies, p. 20-103.

2 Elisabeth Sköns, Agnès Courades Allebeck, Evamaria Loose-Weintraub and Petter Stålenheim, Military expenditure, SIPRI Yearbook 1999: Armaments, Disarmament and International Security, p. 300-316.

3 In the case of the United Kingdom, the Parliament is not given the opportunity to ratify international treaties. Rather, the executive branch of the government can bind the United Kingdom to treaties without parliamentary oversight or influence.

4 Letter of intent between six Defence Ministers on Measures to facilitate the Restructuring of the European Defence Industry.

5 Press release by the French Ministry of Defense, 27 July 2000.

6 Elisabeth Sköns and Reinhilde Weidacher, Arms production, SIPRI Yearbook 1999: Armaments, Disarmament and International Security, p. 389.

7 Björn Hagelin, Pieter D. Wezeman and Siemon T. Wezeman, Transfers of major conventional arms, SIPRI Yearbook 1999: Armaments, Disarmament and International Security, p. 424.

8 "EU urges quicker consolidation in Europe’s aerospace industry", European Business News, September 24, 1997.

9 "EU six to sign action plan on defence industry restructuring", Afx News (London) July 6, 1998.

10 Article 223 of the Treaty of Rome

11 The full text of the EU Code of Conduct on Arms Exports. 

12 For a full list of the seventeen proposals contained in the U.S. Defense Trade Security Initiative, see Department of State Fact Sheet, May 26, 2000. 

13 Colin Clark, "U.S. Export License System Broken, Say Allies," Defense News, April 24, 2000, p. 3.

14 Colin Clark, "State Department Splits on Export Reform," Defense News, March 13, 2000, p. 1.

15 "Defense Trade Security Initiative Promotes Cooperation and Greater Technology Sharing With U.S. Coalition Partners," News Brief Released by the Bureau of Political Military Affairs, U.S. Department of State, Washington, DC, May 26, 2000. 

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