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Summary: The transatlantic defense market remains highly fragmented and characterized by a lack of trust between transatlantic actors. This paper argues that a more open and integrated transatlantic defense market would largely benefit both Europeans and Americans, as it would generate economies of scale, foster positive industrial competition, and limit the risk of technology gaps between partners. It also provides concrete recommendations to overcome the current obstacles to transatlantic cooperation in the field of the defense industry, and therefore strengthen the transatlantic relationship.
The Role of the Defense Industry in Transatlantic Strategic Choices
by Clara M. O’Donnell
Introduction Americans and Europeans would greatly benefit from more open defense markets across the Atlantic. Governments would pay less for better military equipment, their armed forces would find it easier to operate in the field, and the transatlantic relationship would be strengthened. Yet the transatlantic defense market remains highly fragmented. In what can only be characterized as a striking absence of strategic thinking, U.S. and European governments buy primarily from their national suppliers and use unnecessarily cumbersome rules to regulate their defense sectors. This paper reviews the principle reasons for this state of affairs. It also provides some policy recommendations so that transatlantic leaders may partly remedy it. Missed Economic Opportunities Even prior to the defense spending cuts introduced across much of Europe in response to the economic crisis, EU governments had acknowledged that their military budgets were insufficient to sustain technologically cutting-edge defense industries at a
national level. As a result, memberstates have repeatedly stressed the need to integrate European defense markets and consolidate their industries. But some military capabilities — such as certain space assets or manned and unmanned combat aircraft — are becoming so expensive to develop that even together, Europeans will struggle to generate the demand needed to support several suppliers. Meanwhile, in the United States, industrial consolidation in recent decades has left the Department of Defense with a restricted number of domestic suppliers for certain capabilities. Balanced transatlantic defense trade would enable Europeans and the United States to generate the economies of scale required for the most expensive military capabilities. It would also increase pressure on suppliers on both sides of the Atlantic to offer competitive prices. But despite the talk amongst EU governments of the need to integrate their defense industries, Europeans — and the United States — continue to buy military equipment primarily from their national suppliers. In 2009, the Pentagon awarded around
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98 percent of its procurement budget to U.S. companies.1 Between 2011 and the spring of 2013, France, Germany, and Italy awarded 2 percent or less of their contracts to foreign firms when using new EU rules on defense procurement — despite the fact that the new rules are designed to increase the amount of intra-EU competition.2 Governments prefer equipment to be made at home partly because they want to ensure access to, and control over, sensitive weapons systems and technologies. But for many transatlantic allies, buying defense capabilities is also a way to support the national economy. The procurement choices of ministries of defense are often influenced by the number of jobs a defense company can create or the amount of technology it transfers to the country. As a result, even when a government does buy military equipment from a company based in a transatlantic ally, the kit is not always the most cost-effective. Americans and Europeans also curtail the economic benefits of transatlantic defense trade through their complex and mostly uncoordinated regulations — be it in relation to export controls or rules governing foreign investments. Governments must ensure that sensitive equipment and information do not fall into the wrong hands. But given the closeness of military ties amongst transatlantic allies and the globalized nature of today’s defense industry, some of the current checks are disproportionate — notwithstanding recent efforts by both the EU and the United States to streamline their export controls. In some European countries, controls on foreign investment are so heavy that it is hard for defense companies based there to accept benign investments from transatlantic allies. Defense firms with plants in countries on both sides of the Atlantic often need to request time-consuming authorizations to move a relatively non-sensitive component between plants. Similarly, when a U.S. and European defense company merge, their home governments often ask for security firewalls that are so extensive that the merged company needs to maintain separate research departments and production lines for their U.S. and European markets. Missed Military Opportunities The limited integration of the transatlantic defense market also hampers allied forces in combat operations. To begin, armed forces from across Europe and the United States miss out on the technological breakthroughs in military equipment that could have occurred if large U.S. and European suppliers had been able to take advantage of the market’s economies of scale. In addition, because of the importance many governments attribute to job creation when buying military capabilities, some armed forces operate equipment that is less effective than the kit used by their allies. Finally, because transatlantic allies often do not consult each other when buying their military equipment from their national suppliers, they sometimes use different technical standards. As a result, their armed forces can struggle to communicate on the battlefield, or cannot provide each other with spare parts.
Because transatlantic allies often do not consult each other when buying their military equipment from their national suppliers, they sometimes use different technical standards.
Transatlantic military cooperation is also hamstrung by the complex web of export controls upheld by allies. As discussed above, a certain amount of export controls is essential. And even within the transatlantic alliance there is significant mistrust amongst countries. Some worry that their allies lack the technical capacity to stop military equipment illegally leaving their territory. Others are uneasy about the willingness of certain allies to export to countries the former consider unsafe, such as Russia and China. But in the same way that Europeans and Americans maintain excessive export controls on their defense companies, they impose too many checks on their transatlantic allies. For example, when a European country buys sophisticated U.S.-made equipment for its armed forces, Washington frequently does not share the technical infor2
1 Jeffrey Bialos, Christine Fisher, and Stuart Koehl, “Fortresses and icebergs,” Center for Transatlantic Relations, Johns Hopkins University, 2009. 2 European Commission, “Commission staff working document on defence, Accompanying the document: Communication, towards a more competitive and efficient defence and security sector,” July 24, 2013.
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mation underpinning the equipment. As a result, if the kit breaks down in operations, it will at times need to be sent back to the United States for repairs, meaning the military operation can suffer if the equipment is out of action for long periods of time. According to EU officials, Washington’s reluctance to share technical information relating to its military capabilities also recently created difficulties for Germany’s efforts to certify the Euro Hawk. Policy Recommendations At a time of significant defense spending cuts on both sides of the Atlantic, Europeans and American stand to gain even more than in the past from integrating their defense markets. Over the next few years, they should consider: • Agreeing on common standards for air-worthiness for unmanned systems. A number of regulatory bodies in the United States and Europe are currently reflecting on the rules with which drones will have to comply in order to fly in civilian airspace. But according to defense industrialists, transatlantic cooperation on certification is limited. Europeans and the United States should flesh out common standards. Otherwise the possibilities for transatlantic trade will be curtailed. In addition, Europeans and the United States would run the risk of being unable to deploy remotely piloted aircraft to help their allies in a military or civilian emergency because they might not have permission to fly in each other’s airspaces. • Including the United States in the EU’s intra-EU arms exports directive. The U.S. government and the European Commission should explore ways to include the United States in the EU’s directive on intra-EU arms exports. If EU governments decide to provide general and global licenses to a large amount of military items and the United States is not involved, it will limit the benefits of the directive because of the significant presence of ITAR components in Europe. In the long term, it could hurt U.S. interests as it could reduce the appeal of U.S. made-components for European companies and armed forces. • Creating an EU investigative committee to monitor foreign investments in defense and coordinate with CFIUS. EU governments should set up a common investigative committee to monitor foreign investments in defense companies across the EU. The coor3
dination of EU rules on foreign investments would make life simpler for investors and would also give EU states stronger guarantees on their security of supply. Currently, EU states rarely consult each other when a foreign investor wants to acquire one of their defense companies; yet a fellow EU country might rely on that company to provide them with components or finished military equipment. Once the EU Committee is set up, Europeans and Americans should agree on regular consultations between it and its U.S. counterpart, CFIUS.
About the Author
Clara O’Donnell is a nonresident fellow at the Center on the United States and Europe under the Foreign Policy program at the Brookings Institution and a senior research fellow at the Centre for European Reform, a leading European think tank in London. Based in Washington, DC, she is an expert on EU foreign policy, European defense, and the transatlantic defense market.
The German Marshall Fund of the United States (GMF) strengthens transatlantic cooperation on regional, national, and global challenges and opportunities in the spirit of the Marshall Plan. GMF does this by supporting individuals and institutions working in the transatlantic sphere, by convening leaders and members of the policy and business communities, by contributing research and analysis on transatlantic topics, and by providing exchange opportunities to foster renewed commitment to the transatlantic relationship. In addition, GMF supports a number of initiatives to strengthen democracies. Founded in 1972 as a non-partisan, non-profit organization through a gift from Germany as a permanent memorial to Marshall Plan assistance, GMF maintains a strong presence on both sides of the Atlantic. In addition to its headquarters in Washington, DC, GMF has offices in Berlin, Paris, Brussels, Belgrade, Ankara, Bucharest, Warsaw, and Tunis. GMF also has smaller representations in Bratislava, Turin, and Stockholm.
Dr. Alexandra de Hoop Scheffer Director, Paris Office German Marshall Fund of the United States Tel: +33 1 47 23 47 18 Email: firstname.lastname@example.org
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