Defence Business: Standing alone - Australian industry in the ITARs arena | ADM Oct 2010
Recent Defence management of US export controls matters has exposed Australian companies to unnecessary demands and costs, and has eroded the promise of US export control gains made over the past decade.
Steve Hyland | Adelaide
Defence Department mismanagement of United States (US) export controls relationship became evident in 2008 when, after years of close cooperation, the State Department – which administers US export controls – disassociated itself from working with the Defence Materiel Organisation (DMO) on export control matters of interest to Australian companies.
Defence suggested this was a predictable re-alignment in the relationship after the Department’s Strategy Group, rather than the DMO, was assigned to lead the negotiation of the Australia/US Defence Trade Cooperation Treaty.
In fact, the fracture resulted from a mishandling of export control issues at a meeting of a joint US/DMO committee, rather from the Strategy Group’s involvement on the Treaty.
Nevertheless, Strategy Group’s Treaty role was a surprise given the DMO’s experience in negotiating US export control arrangements, including the treaty-level 2002 International Traffic in Arms Regulations (ITARs) exemption agreement.
But in the lead up to the 2007 Australian Elections, Defence was under pressure to fast-track the Treaty; and Strategy Group, which did not share the DMO’s industrial interests, was less likely to become bogged down in the negotiations.
In the event, the Treaty was delivered in almost record time, and was signed by then Prime Minister John Howard and President Bush two months before the elections.
But a heavy price was paid. Australia’s Treaty negotiators appear to have rolled over to US demands, but most evidently in the Treaty’s Implementing Arrangements, which embarrassingly favour US over Australian companies.
Fortunately, US ratification of the Treaty – and thus the imposition of its obligations on Australian companies – has been held up for almost three years by an impasse between the US Senate Foreign Relations Committee and the State Department over whether or not the proposed Treaty regulations will be submitted for review before or after ratification.
Unless this impasse is overcome, the Treaty will not be ratified and a decade of DMO effort to improve US export controls for Australian companies will have come to nothing.
And, notwithstanding the bureaucratic dodge in the 2010 Defence Industry Policy Statement Building Defence Capability that the Government “is working cooperatively with the US to identify and deliver effective solutions as efficiently as possible”, it is obvious that Defence’s enthusiasm for improving the US export control environment for Australian companies has waned significantly.
Strategy Group’s primary interest is not in supporting Australian companies on US export control matters (the Treaty amply demonstrated this!).
For its part, the DMO appears to have abandoned the field: its export control relationship with the State Department has failed; it had little influence on the Treaty as is evident in the Treaty Implementing Arrangements; and it no longer works with Australian industry on US export control issues.
Communication skills
Indeed, the DMO didn’t even talk to Australian industry before agreeing with the US government to suspend a 2006 program aimed at speeding up US licences for Australian companies.
Instead, it unquestioningly accepted the State Department’s advice that licence processing times had improved.
Any export control practitioner in Australia could have told the DMO that there has been no improvement in licence processing times for years!
And in relation to routine support, the DMO now only provides “advice and support to Project Offices on US defence export controls”. Companies are advised to direct queries “to the appropriate project office in the first instance”.
Long experience working on US export controls suggests that DMO project offices are simply not equipped to provide advice or support on ITARs matters.
To fill the vacuum, the DMO expects Australian companies to adhere to the export control demands (‘advice and support’) of US companies and their subsidiaries working on defence projects.
It doesn’t matter that the demands may or may not be valid or excessive.
It is well known that US companies often go overboard in interpreting and implementing ITARs obligations just to be on the safe side.
There are many examples in Australia, such as an Australian subsidiary, acting on the advice of its US parent, requiring nationality information for all its Australian business partners’ representatives attending a meeting at the subsidiary’s premises – even though the business partners were themselves licensed for access and thus responsible for their own nationality compliance.
Adding to the confusion, different US companies working on the same project often seek to impose their own ITARs requirements on Australian companies.
Where there is an inconsistency between two US companies’ interpretation of the ITARs, their Australian business partners have no choice but to adopt the most conservative requirements.
Even US Defence Secretary Gates has questioned the need and usefulness of the ITARs framework, calling for a massive overhaul of the system.
“The problem we face is that the current system – which has not been significantly altered since the end of the Cold War – originated and evolved in a very different era, with a very different array of concerns in mind,” Gates said in an April 2010 speech to business executives.
“As a result, its rules, organizations, and processes are not set up to deal effectively with those situations that could do us the most harm in the 21st Century – a terrorist group obtaining a critical component for a weapon of mass destruction, or a rogue state seeking advanced ballistic-missile parts.
“Most importantly, the current arrangement fails at the critical task of preventing harmful exports while facilitating useful ones.
“The US is thought to have one of the most stringent export regimes in the world. But stringent is not the same as effective.”
Cost implications
This adds to their costs and skews the US export control environment in Australia towards the most conservative setting.
The State Department is happy.
But surprisingly, Defence also wins because it adopts a relaxed attitude to its own ITARs compliance, but stands tall on the excellent compliance record of Australian companies thus guaranteeing continued to access US technology.
But to the extent that Australian industry is harmed by excessive ITARs exposure – and added costs – Australia also loses.
In the short term, increased costs flow through to Defence projects.
In the longer term, the ITARS is like a cancer which will eventually infect Australian products.
When this occurs, Australian companies will not able to export, transfer or otherwise dispose of their products – or use their products for Australian Defence benefit – unless they have the prior written approval of the State Department.
The Defence Industry Policy Statement’s acknowledgement that “the pace at which potential solutions are being identified is frustrating for industry” is simply a cop out.
Australian industry must regain its champion in the US export control policy arena, and its supporter on day-to-day US export control issues.
Defence needs to wake up before it’s too late and re-establish its export controls expertise, return to being proactive on ITARs matters, work with Australian companies, and press the US Government to improve the export control environment.