Prepared for the IISS/CEPS European Security Forum, Brussels, 25 November 2002
Defense industrial cooperation across the Atlantic has fallen on bad days in recent years.
The number of official transatlantic defense programs has dwindled to a handful, of which the frequently-threatened MEADS air defense system is the most notable. [1]. Increasingly, for major defense acquisition programs, such as air transport and missiles, European governments are showing an inclination to "buy European," while the U.S. tradition of "buy American" remains as hardy as ever.
Industry joint ventures such as Thales-Raytheon Systems, have yet to generate business growth. Strategic partnerships, such as that between EADS and Northrop Grumman, have yet to bear significant fruit in the form of access for firms on one side of the Atlantic to the defense market on the other side. The most successful transatlantic market access has gone to the few, largely British defense companies (especially BAE Systems and Rolls-Royce) that have established themselves in the only growing defense acquisition market in the transatlantic region – the United States.
Nor is transatlantic defense cooperation being incentivised by growth in the European defense acquisition market. Although the substantial market shrinkage of the past decade has been largely halted, only the French defense acquisition market seems poised to grow; cuts continue in the UK, Germany, Italy, Sweden, Spain and the Netherlands. [2] A reversal of this trend seems unlikely in the near future.
There are significant and growing obstacles to achieving a more open and flexible transatlantic regime for defense industrial and technological cooperation. Most of these obstacles are the result of government policies, principally in the United States, but increasingly in Europe, as well. Despite these negative signs for the transatlantic industrial relationship, the logic of stronger defense industrial and technological cooperation remains compelling. For this logic to prevail, however, the transatlantic obstacles will need to be overcome. It is not yet clear that policy-makers are prepared to take the necessary steps, but the policy options are relatively clear.
Over the 1990s, strategic visions between Europe and the United States began to diverge sharply. The U.S. emerged as the dominant global power and has become a less and less reluctant sheriff in the wake of the terrorist attacks of September 11, 2001. A new, initially hesitant administration is now fully engaged, with forces operating against terrorist on a global basis and a full-scale attack in Iraq waiting in the wings. In service of this engagement, U.S. forces are being transformed for even more global operations, acquiring network-centric technology that puts them years, if not decades, ahead of any other country's capabilities.
In Europe, with Britain and France each deciding to abandon defense autonomy and fully commit to the EU Headline Goal, there has been more dramatic progress toward a common European security policy and defense capability than in the preceding four decades. However, there is still no European strategic vision to accompany the Headline Goal forces. For fifty years the strategic attention of Europe has been focused on European security issues, with declining attention to global security concerns. This has left a large "vision gap" with the United States, with significant impact on comparative capabilities. [3]
While French and British forces have undergone significant changes – conventional force personnel reductions, reforms, and, in the French case, professionalization, few other major European countries, especially Germany, have set out on the road of trading personnel for real capability. Shrunken European defense budgets remain heavily focused on personnel spending. Acquisition euros are in short supply and research and development budgets fall very short both of US funding (roughly four times as great) and of a level that would produce network centric or transformational technologies in Europe.
With September 11 and the emergence of proliferation and terrorism as major security concerns, however, a new common strategic interest is emerging across the Atlantic. The old NATO rationale is gone, but the Prague summit will reflect a new concern, beyond ensuring the continued stability of troubled European regions. Proliferation and the threat of weapons of mass destruction delivered by multiple means concerns Europe as much as it does the United States. And the terrorist threat, while not new, now poses a danger of asymmetrical nature and significant magnitude both to Europe and the United States. Confronting these threats together is clearly preferable to diverging policies across the Atlantic. Even, in fact, especially in coalitions of the willing, the partners continue to need interoperability, especially as network centric technologies become central to military operations.
The logic of cooperation is having an impact on governments in the NATO region, as reflected at the Prague summit. The U.S. Missile Defense Agency is explicitly encouraging allied participation in the BMD program, a goal underpinned by NATO-funded research efforts in missile defense. The NATO summit has endorsed a reframing of the 1999 Defense Capabilities Initiative that focuses on interoperability investments, especially those that support network centric warfare, such as secure command, communications and information. The U.S. has proposed creating a NATO rapid reaction force, capable of conducting out-of-area operations, which is likely to be adopted by the Alliance. [4] Such a force will require dedicated funding and interoperable technologies, increasing the incentive for transatlantic collaboration in these areas. Finally, NATO may, once again, endorse a common air-ground surveillance system (AGS), with a possible transatlantic technological solution that requires transatlantic industry collaboration.
The limited European defense budgets provide a particularly compelling rationale for Europeans to seek a flexible transatlantic industry and technology regime. Limited budgets for defense investment, in particular, could prove to be the Achilles' heel of the EU effort to create a Headline Goal force with effective transportation, air power, precision-guided munitions, unmanned aerial vehicles, and C4ISR. The NATO summit decisions could add to this budgetary pressure. Europeans will want to be certain that investment dedicated to a new NATO RRF does not compete with investments required for the Headline Goal force. [5] However, the new joint force and the AGS program constitute clear incentives to transatlantic industrial cooperation. Access to US defense technologies through transatlantic cooperation could provide substantial cost savings to the Europeans. Combined with reprioritization of European budgets to focus on transformational technologies, resources could be focused on the most compelling capability needs.
Despite rapid defense budget growth, the US could share this interest. Even projected US acquisition budgets are inadequate, given the dual requirements for equipment modernization and transformational technologies, combined with growing personnel and operational costs. As the U.S. budget deficit grows, future defense budgets will come under further pressure. Stronger, competitive transatlantic options for defense equipment could be part of the answer to this budget dilemma.
For both the US and Europe, a more integrated industry and technology regime that incentivized industry collaboration would provide defense policy-makers with enhanced choices, competition and flexibility in defense acquisition. As industry has consolidated, the number of providers of defense platforms has declined, constraining defense ministry options in Europe and for the DOD. The advantages of competition, in pricing, technical capability and timing, are slowly being lost. A broader array of technical options would be available for defense planners and costs could be better controlled, a significant advantage within constrained investment budgets.
The communications, information, networking, sensoring and satellite technologies that are critical to network centric warfare and combined operations are widely dispersed and commercial in origin. The capacity to integrate these technologies into military applications is less dispersed, limited largely to American and a very few European companies. European firms, particularly Thales, BAE Systems and EADS, possess the commercial technologies in abundance and are increasingly capable of integrating those technologies in defense systems. [6] There are clearly advantages to greater flexibility in the technology transfer regimes between these two continents and significant downsides to either side shutting itself off from the technologies available to the other side. A flexible regime across the Atlantic for such technology transfers, combined with more common barriers to its dispersal elsewhere, could be in the interests of both.
As developments in the European shipbuilding, ground systems, and aircraft industries suggest, it is increasingly difficult for European industry to sustain itself on European acquisition spending, alone. Given such limits, the incentive for European defense industries to gain access to the US market is growing grow. Major US defense firms, while less dependent on the international market, are losing their historic access to the European market. Traditional access to Europe through direct sales is no longer acceptable. Only partnerships with European firms will provide future access and these are viable only if there is reciprocity in the policies governments pursue on both sides. [7]
The defense industry on both sides of the Atlantic has recognized and responded to these incentives for greater cooperation for a number of years now. The same cannot be said for government policies, which create growing obstacles to a more flexible transatlantic regime.
The barriers to entry into the American defense market are major obstacles to a more transparent, open and flexible transatlantic defense industrial relationship. They are largely based on government policies, many of which have existed for decades and are difficult to change. Defense Department acquisition and defense trade policies are major obstacles. They include a strong and understandable DOD preference for buying US defense technologies, which are seen as significantly more advanced than comparable European technologies. There is also a strong DOD preference to protect US defense technological leadership and carefully restrict European access to US technical know-how. These preferences are reinforced by a guarded DOD approach to technology transfer and direct foreign investment by non-US defense suppliers in R&D and production facilities in the United States.
Beyond DOD, the State Department, which administers the review of more than 45,000 export license requests a year, takes a generally conservative view of the export of technologies on their Munitions List to any other country, including members of the EU. Export control rules written during the Cold War have been extended since then, with the policy bureaucracies remaining concerned about the risk of the loss of technological superiority and the proliferation of capabilities that could be used, one day, against the United States.
There are also substantial hurdles in the way of direct non-U.S. investment in the U.S. market. While some firms, notably BAE Systems and Rolls-Royce have succeeded in overcoming these barriers, few other European firms have done so. The Committee on Foreign Investment in the United States (CFIUS) system for screening non-U.S. direct investment in the U.S. economy can be a deterrent to entry. The security rules surrounding such investment, controlled by the Defense Department, essentially cut U.S. operations off from their non-U.S. parents, are a further deterrent.
Executive branch policies in Washington are mirrored by political concern in the US Congress, where defense technology export licensing and technology transfer issues and direct investment by European firms in the American defense economy have been hotly debated over the past decade.
Substantial effort was invested in the late 1990s in trying to overcome some of the more frustrating obstacles to transatlantic defense industry collaboration. [8] The Defense Department's system for reviewing export licenses was substantially streamlined, and a more flexible special security arrangement negotiated with Rolls Royce's U.S. operations. Secretary of Defense William Cohen negotiated Declarations of Principle (DOP) on reforms in defense trade relationships with the government of Australia and the United Kingdom. After considerable struggle, broader export licensing regimes were introduced at State. In particular, following the May 2000 announcement of the Defense Trade Security Initiative (DTSI), other countries may be eligible to negotiate a waiver for certain trade under the International Traffic in Arms Regulations (ITAR), which govern State's process for export licenses, provided those negotiations led to a compatible export control regime in that country.
The U.S. reforms of the late 1990s largely ground to a halt with the arrival of a new administration in Washington, DC. The Defense Department has not continued the previous administration's effort to further reform its internal licensing process and no new special security arrangements have been negotiated with non-American subsidiaries in the United States. DOD has been reluctant to release technologies that might tie into weapons of mass destruction or the means of delivering WMD. Although a DOP has been negotiated with Sweden, there appear to be no plans to initiate such talks with other governments. With respect to specific technology transfers, DOD (and State) have allowed German access to UAV technology, particularly the Global Hawk airframe, and for Italy with respect for the Predator UAV, but there has been no broader policy decision. In general the tone of DOD policy with respect to transatlantic defense industry cooperation has been less forward leaning than in the prior administration.
The State Department has continued negotiations with the UK and Australia on an ITAR exemption as described in the DTSI, but those talks continue to proceed very slowly. The greatest obstacle continues to be a cautious State Department view about whether the UK must legally enforce US. third country transfer rules and regulations or whether a British government policy with the same effect is adequate The agreements may come to a conclusion in the next few months, but will face implementation obstacles in the U.S., given Congressional resistance to any ITAR exemptions. There has been no consideration given to opening a multilateral dialogue on export controls and technology transfer questions with the leading European arms producers. A part of the State Department Munitions List, which itemizes controlled products and technologies, has been reviewed, but there has been little attempt to actually reduce the size of the list itself. Investment rules have not been changed. The DOS bureaucracy that processes export licenses has been streamlined, connected electronically to other agencies with equities in the license decision, and has received an increase in personnel. The shape of its underlying task has not been changed, however.
Until late 2002, there has been little attention paid by the new administration to questions of transatlantic defense industrial and technological cooperation. Policy-makers were preoccupied with the war on terrorism, which actually increased concern over the possible release of technology that might be used for weapons of mass destruction or ballistic missiles. In October 2002, the National Security Council finally began a long-delayed review process, issuing instructions to agencies to review the broad agenda of defense trade, technology transfer, transatlantic technology cooperation, and U.S. arms transfer policies, export controls and advocacy. Details of the review are not publicly available, though it is said to cover the definition of options for closer cooperation, the changes in policy, regulation and law that might be necessary for such cooperation, and the risks that might accompany cooperation with specific countries.
Although it is not the purpose of this paper to examine European policy closely, it is worth noting that the historically open European defense market may be in the process s of closing substantially, as part of the "Europeanization" of overall defense policies and defense industrial policies, in particular. The EU commitment to the Headline Goal, declining European defense budgets, and the consolidation of the European defense industry are having an impact on European defense acquisition decisions and emerging defense industrial and technology base. Gradually, a tendency may be emerging to protect the European defense industrial and technology base from American domination, and to sustaining a European industrial and technological capability to sustain and support the broader security goals of a uniting Europe.
The "buy European" preference may be indicated by the European commitment to the Meteor missile and the A-400M transport aircraft. These two decisions could signal a future in which EU members buy major hardware platforms from European suppliers, with smaller procurements being more transatlantic. [9] European governments have encouraged the creation of European counterparts and competitors to US defense industrial giants to meet these needs and, as the Headline Goals of the ESDP have been more sharply defined, these capabilities are being looked to for the necessary equipment and technologies, including air transport, sealift, precision guided munitions and unmanned aerial vehicles. [10]
There is also a growing cross-national trend to create European-level institutions and policies to provide the legal setting and road map for European defense acquisition policies and defense industry behavior. Such harmonization is seen as necessary for an healthy, cross-national industrial base, as well as to ensure that this industry does not escape governmental scrutiny and controls. [11] Under the July 2000 "framework agreement" six countries (UK, France, Germany, Italy, Sweden and Spain) have undertaken to harmonize practices and regulations on export controls, security of supply, the security of classified information and industrial security, defense research and development, the treatment of technical information, and defense requirements. [12]
Four of these nations – France, Germany, the UK and Italy – have also created a joint defense acquisition organization in 1996 – known as OCCAR for its French name (Organisation Conjointe de Cooperation en Matière d'Armement) to manage the growing number of collaborative programs among these countries, including, ultimately, the A400M. OCCAR is increasingly seen as the prototype of a European defense acquisition agency, which may emerge in the EU framework with expanded membership sometime in the future. [13]
As the EU member states protect employment in the defense industry and move to stimulate a European R&D technology base in advanced defense technologies, two tendencies may appear. First, European level institutions will be increasingly tasked with regulatory responsibilities for this activity. [14] As one EU official has put it: "You cannot have a defense policy for 15 and an industrial base harmonized at six." [15] Second, this emerging European industrial and technology base will be protected from the United States. European governments will be willing to pay a premium for defense equipment, and acquire slightly less advanced technology, more slowly, in order to support this base.
The goal of a more flexible transatlantic regime would be an industrial and technological relationship that is more reciprocal, integrated and transparent, while ensuring that critical defense technologies leak as little as possible to potentially threatening states. It should be based on first principles:
The negotiations themselves should address a number of issues:
This is a daunting agenda. The alternative, however, is the gradual shrinkage of the transatlantic defense market, under political and bureaucratic pressure, the loss of interoperability and a growing technology gap between US and European militaries, and a loss of technological opportunity for the militaries of both sides.
[1] Although the F-35 Joint Strike Fighter has a number of European participants, it does not qualify as an official transatlantic program. It is, rather, a U.S. program with European participants, of which the UK is by far the most equal. JSF is, however, a harbinger of things to come - a dominant U.S. program, whose growth could gradually drive European producers out of the airframe business.
[2] The British defense budget is slated to grow 1.2% a year after inflation thorough 2005-2006; French equipment budgets are expected to grow just below 1.0% a year, after inflation through 2008. German defense budgets will remain flat, which will mean decline in constant euros., though a German budget review is currently under way. The Italian defense budget is projected to grow significantly, but much of the additional funding will be dedicated to personnel as a transition takes place to a smaller, all volunteer force. See IISS, "NATO and non-NATO Europe," The Military Balance, 2002-2003, pp. 248-49 and Ministere de la Defense, Programmation Militaire 2003-2008: Project de Loi de Programmation, Paris: Ministere de la Defense, September 2002.
[3] See Gordon Adams, "Seeking Strength in Numbers: The European Allies and U.S. Defense Planning," in Cindy Williams (ed.), Holding the Line: U.S. Defense Alternatives for the Early 21`st Century, Cambridge, MA: MIT Press, 2001, pp.79-117, and Robert Kagan, "Power and Weakness, , Policy Review 113 (June-July 2002).
[4] A prototype of such a force has been described as "a small, elite, mobile expeditionary force...maintained at high readiness, capable of swiftly projecting power to distant areas outside Europe and then conducting demanding combat operations with US forces in a wide spectrum of contingencies." See Hans Binnendijk and Richard Kugler, "Transforming European Forces," Survival, Vol.44, No.2 (Autumn 2002), p. 118.
[5] Binnendijk and Kugler argue that the NATO force will require minimal resources – perhaps two percent of current European NATO defense spending – and draw largely on existing capabilities. Above, p.129.
[6] See Frost and Sullivan, "European Command, Control, Communications, Computers and Intelligence, Surveillance and Reconnaissance (C4ISR) Market," Report B055-16, 2002 and the panel reports of the European Institute' Interoperability Project, 2001, available at
[7] There is a growing tendency among U.S. prime contractors to focus on the short-term growth in U.S. defense acquisition and to set aside, for now, this transatlantic interest. Changes in European acquisition practices could further constrain access to the European market, however.
[8] For a discussion of the U.S. reform process between 1996 and 2000, see Gordon Adams, "Fortress America in a Changing Transatlantic Defence Market", in: Burkhard Schmitt (ed.), Between Cooperation and Competition: The Transatlantic Defence Market (Chaillot Paper No.44), Paris: Western European Union, January 2001.
[9] They are consistent with a longer European history of creating and subsidizing cross-border defense platforms, including the Eurofighter, the NH-90 and Tiger helicopter programs, and a large number of MBDA missile programs.
[10] See Gordon Adams, "Convergence or Divergence?: The Future of the Transatlantic Defense Industry," in: Simon Duke (ed.), Between Vision and Reality: CFSP's Progress on the Path to Maturity, Maastricht: European Institute for Public Administration, 2000, pp.161-208.
[11] Author's interviews with government officials in France, Germany and the UK, Summer 2001.
[12] The intent of this process is to "create the political and legal framework necessary to facilitate industrial restructuring in order to promote a more competitive and robust European defense technological and industrial base in the global defense market and thus to contribute to the construction of a common European security and defense policy." Preamble to the Framework Agreement between the French Republic, the Federal Republic of Germany, the Italian Republic, the Kingdom of Spain, the Kingdom of Sweden, and the United Kingdom of Great Britain and Northern Ireland concerning Measures to Facilitate the Restructuring and Operation of the European Defence Industry, signed at Farnborough, United Kingdom, 27 July 2000.
[13] Interviews in Brussels, Paris, Berlin and London, Summer 2001. See also, Christophe Cornu, "Fortress Europe: Real or Virtual?," in: Adams, Cornu, James and Schmitt, Between Cooperation and Competition: The Transatlantic Defence Marke, (Chaillot Paper No. 44), Paris: Institute for Security Studies of the Western European Union, January 2001, pp. 77-80.
[14] The European Union does not yet have a coherent defense industrial and technology policy, but there is considerable interest in the Commission in having such a policy and an emerging interest in the Council of Ministers, as well. Current Commission responsibilities for industrial policy, dual-use research and development, public procurement, customs policies, and dual-use technology exports controls will inevitably lead to greater involvement in the defense industrial and technology arena. The Council, through its Armaments Policy committee, currently has what responsibility exists at the EU level. See Commission of the European Communities, Communication from the Commission to the Council, the European Parliament, the Economic and Social Committee and the Committee of the Regions on Implementing European Union Strategy on Defence-Related Industries, COM(97)583 Final, Brussels, December 4, 1997, Annex I, p. 2.
[15] Interview in Brussels, Summer 2001.