ARTICLE

May 2003

Industry Suggests Improvements for Exports

by Benjamin Stone and Dennis Kennelly

The Bush administration is conducting a comprehensive review of defense trade export policy. The White House initiated the review—commonly known as NSPD-19—in an effort to identify changes needed to protect the country’s national-security and foreign-policy interests.

Today’s defense trade policies and regulations do not reflect current realities—first, the current cooperation and collaboration required for the U.S. defense industry to supply best value for U.S. programs and, second, the growing effect of the globalization of the defense market. Previous reviews have not resulted in the wholesale revision of the export regime that was once anticipated.

The U.S. Departments of Commerce, Defense and State, along with other federal agencies, have been tasked with conducting the review. Industry has provided comments to several defense-related agencies, via industrial working groups hosted by organizations such as NDIA and the Defense Trade Advisory Group. DTAG was created by the State Department to provide an industry viewpoint on defense trade-related policies.

Earlier this year, the Center for Strategic and International Studies hosted a discussion panel with members of industry, DTAG and the Defense Trade Security Agency on NSPD-19. At this meeting, William Schneider, chairman of the DTAG, presented industry recommendations. Among the key points:

Although the statutory basis for arms transfers are appropriate and legitimate instruments of foreign policy, these policy objectives need to be supported and restated with clarity. Arms transfers, defense industrial cooperation and foreign direct investment in the U.S. defense market support the goals of alliance solidarity and military interoperability.

The globalization of the scientific and industrial base reinforces the need to expedite the development of an alliance-wide industrial base. Such a base will help both to reduce excess capacity and to focus the alliance defense industrial base upon the economic concepts of comparative advantage and specialization of labor. This will enable it to be a far more efficient instrument for creating defense capabilities and a diminished source of transatlantic friction.

Existing U.S. policy should be revised to permit U.S. government entities to use appropriated funds to advocate arms transfers. Arms transfer advocacy should not discriminate between foreign military sales and direct commercial transactions.

The security assistance program needs to be reformed to make it a more flexible instrument able to deploy appropriated funds effectively to serve U.S. foreign policy interests. The Defense Export Loan Guarantee (DELG) program is a $15 billion loan-guarantee program that can effectively parallel the aims of the security assistance program by providing a source of funds to finance defense exports that does not depend upon appropriated funds.

The nature of the globalized defense sector has enabling technology frequently developed offshore as well by a high-tech internationally mobile labor force. Moreover, the evolution of Europe’s institutions reflects a migration away from exclusively national regulation.

The defense industry is likely to develop a global presence and a need to move products between company operating units in the United States and subsidiary organizations abroad. Therefore, the definition of a “U.S. person” from a defense trade regulatory perspective (including dual-citizens) is an area that needs to be addressed.

The definition of “deemed exports,” definitions of citizenship and the manner in which dual-citizens, permanent residents and foreign nationals are treated for export control purposes also must be addressed. As a matter of public policy, a uniform approach applying to allied nations would be a constructive step. A regulatory approach could facilitate the development of a more integrated transatlantic defense trade community. That would be to create an “enterprise trade assistance agreement” for U.S.-based firms with subsidiaries abroad and offshore firms with U.S. subsidiaries holding a special security agreement or proxy board arrangement with the Defense Department.

Arms transfer regulatory policy should refocus from technology to capabilities. Purging the International Traffic in Arms Regulations of munitions list-licensing requirements will permit a more concentrated policy and regulatory focus on core munitions items that are of the most intense concern for foreign policy purposes. Other products and services may be more appropriately regulated under the Export Administration Act or the Export Administration Regulations, if regulation is still required.

The administration should facilitate the ability of the licensing process to evolve to incorporate alliance or similar multilateral groupings of friendly nations in en bloc license decisions. The evolution of governance among major U.S. allies in Europe is creating multinational groupings that are seeking to harmonize defense acquisition. The U.S. Government should negotiate multilateral enforcement arrangements that will permit individual states to achieve equal enforcement of export control undertakings even though they may use differing processes to achieve such equal enforcement.

Considerable benefit could be gained in shifting defense trade regulation from a transaction focus to a process focus. Consideration should be given to developing a licensing system that would enable the State Department to license an auditable suite of company procedures for the export of defense articles and services. Firms availing themselves of such a procedure then would take over the process of managing individual export transactions—but subject to audit by the State Department to assure compliance.

Congress has expressed concerns about diminished responsibility in arms transfer policy, which may be impacting efforts to modernize and liberalize the munitions licensing system. The administration should consult with Congress, particularly the two bodies most concerned with the issue, the House International Relations Committee and the Senate Foreign Relations Committee. This will make it easier to process changes that require congressional cooperation.

The State Department’s Office of Defense Trade Controls has been hosting the DTAG meetings with industry to discuss their recommendations. DTC has developed its own recommendations, which are not included in this article. DTC is expected to compile its final recommendations in a report to the White House.

Dennis Kennelly is vice chairman of NDIA’s International Division and senior manager of the Washington, D.C., office of MBDA, Inc.

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