Prepared for the IISS/CEPS European Security Forum, Brussels, 25 November 2002

European and Transatlantic Defence-Industrial Strategies

by Burkard Schmitt, Assistant Director, European Union Institute for Security Studies, Paris

The history of transatlantic armaments cooperation goes back to the beginning of the Cold War. Since then, however, the nature of cooperation has changed considerably, from simple licensing of US systems to Western Europe in the 1950s and 1960s to co-production arrangements in the 1970s, followed by government-to-government joint development programs in the 1980s and 1990s. In recent years, industry-led cooperation has become the most prominent feature.

The changing nature of cooperation reflects the changing motivation of the two sides. During the first decades after World War II, the US helped to rebuild an exhausted or destroyed West European defense industry in the face of the Soviet threat. The more European NATO allies recovered economically, the more they sought a more balanced partnership with the US. After the end of the Cold War, interoperability became a major argument for enhanced cooperation. Since the late 1990s, the technological and financial consequences of globalization have pushed industry towards transnational consolidation and closer transatlantic ties, whereas governments have had difficulties matching industry-led initiatives.

In spite of many good reasons for more transatlantic cooperation and numerous initiatives to achieve that objective, the record is rather poor. Arms trade across the Atlantic has remained primarily a one-way-street from the US to Europe, with few cooperative projects having actually been set up and even fewer having been considered as a success. There are several reasons for failure:

Even more important, transatlantic cooperation is hindered by a fundamental imbalance of power between the US and Europe:

The imbalance between the US and Europe can also be seen at the corporate level. The enormous consolidation process that took place from 1993 to 1997 within US Industry reinforced European anxieties about the threat of US market hegemony. Facing competition from giants such as Boeing-McDonnell Douglas, Lockheed-Martin and Raytheon, Europe's national champions and their respective governments (finally) began to accept cross-border integration as the only way to avoid being squeezed out of the market and/or forced into unbalanced subordinate partnerships. The main result of the restructuring process that followed was the creation of three big groups, EADS, BAE Systems and THALES, each of them linked to each other and to the remaining groups by numerous international joint ventures.

This industrial movement, in turn, triggered the so-called Letter of Intent (LOI) process between the governments of the major European arms-producing countries (France, Germany, Great Britain, Italy, Spain, Sweden). In July 2000, the six partners signed a Framework Agreement covering (1) Security of Supply, (2) Transfer and Export Procedures, (3) Security of Classified Information, (4) Research and Technology, (5) Treatment of Technical Information and (6) Harmonization of Military Requirements. In these six areas, the partners committed themselves to create a more homogenous regulatory framework in order to improve market conditions for an increasingly transnational industry.

However, and in spite of all its potential virtues, the Framework Agreement does not actually establish a common armaments policy. On the contrary, armaments remain in the national domain, with defense industrial interests and strategies still diverging.

Industrial policy is only one aspect of largely divergent armament policies in Europe. Another example is the somewhat uncoordinated way in which the LOI countries have embarked on bilateral negotiations with the US on regulatory issues. In fact, industrial consolidation in Europe, together with the LOI process and the development of ESDP, alarmed Washington about the possibility of an emerging "Fortress Europe". The perceived threat of a closed European market, combined with the risk of the lack of any true competition in the US market, pushed the Clinton Administration to launch two initiatives: (a) the Defense Trade Security Initiative (DTSI) aimed at streamlining the US export control system, and (b) bilateral negotiations with certain allies on a "Declaration of Principles on defense equipment and industrial cooperation" (DoP).

Whereas the DoP is de facto a bilateral version of the European LOI, covering a broad range of defense trade issues, the DTSI is comprised of 16 procedural reforms to the US export control regime. Moreover, it includes the possibility for certain qualified countries to enter into negotiations aimed at granting ITAR-license exemptions for unclassified exports to the government and to companies identified as reliable.

Up until now, the DoPs have been signed with the UK; Australia, Norway, Spain and the Netherlands, whilst negotiations with Italy seem to be will advanced, whereas discussions with Germany and France are, at best, at an early stage. So far, the UK is the only LOI-country with whom the US has begun to negotiate a binding export control agreement. ITAR-talks with additional partners are envisaged only after negotiations with the UK have been completed. However, under the Bush Administration these transatlantic discussions have apparently lost momentum, their future therefore being unclear. Even with the UK, negotiations on export controls seem to be experiencing difficulties. However, in general, the different stages of negotiations with the partners suggest that Washington still makes a distinction between "reliable" and "less reliable" allies.

Sooner or later, this distinction might create problems for the compatibility of the multilateral LOI system and the bilateral DoP approach. It remains to be seen how transatlantic arrangements would interact in practice with the LOI Framework Agreement. However, at least in certain areas, bilateral agreements with the US might complicate a system whose purpose is precisely to simplify and facilitate European cooperation. For example, could a European Transnational Defense Company qualify for an ITAR exemption if only one of its home countries has an export control agreement with the US? Or, would the ETDC be obliged to create new Chinese walls between its different sites, thereby limiting its internal integration and acting against the philosophy of the LOI process?

To operate in such an uncertain and fluid environment is certainly not easy for European Industries. As has been seen, a European Armaments Policy and a common defense market, are still a long way off, and defense budgets in Europe remain flat The enormous difference between budgets in Europe and the US represents an irresistible incentive for European companies to attempt penetration of the US market. Indeed, access to the US has become a major strategic goal for all big industrial players in Europe.

There are different ways to achieve that objective:

Another possibility to penetrate the US market is to buy an American company and to become a "national" supplier to the Pentagon. British companies, in particular BAE Systems, have pursued this strategy extensively and with a lot of success. For continental European companies, however, this option has been politically unrealistic so far, and there are no signs that this might change in the near future. What we have seen, by contrast, is a multiplication of joint ventures (Raytheon-THALES) and strategic alliances (EADS-Northrop Grumman).

In land armaments and shipbuilding, the situation is different. By contrast to Aerospace and Defense electronics, trans-European consolidation has failed in these sectors, leaving European companies in a rather weak position vis--vis their US counterparts. As the Santa Barbara and the HDW take-overs have demonstrated, US investors have therefore a good chance simply to "cherry-pick" the European Defense Industrial base.

To conclude, there are not many reasons to be overly optimistic about the future of transatlantic armaments cooperation. Cooperation will certainly continue, but its intensity will probably remain limited by persistent political obstacles. Moreover, cooperation will be mainly industry driven. If they have a commercial and / or a technological interest, companies can be quite innovative in dealing with bureaucratic and regulatory hurdles. In particular at the less visible – and therefore politically less sensitive – sub-system and component level, closer ties are indeed probable. On the other hand, even the big European companies will only be able to cooperate on an equal footing with their US counterparts if they maintain their capacities as system-integrators and if they remain at the cutting edge of technology – not in all, but in specific key areas. This, in turn, will only be possible if European governments keep at least a certain level of R&T funding and if they – finally – come to a common European strategy for their defense-related industries.